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John Moffat.
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maximus07
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This question is not related to a topic. It is general question.
We give dividends to shareholders in cash while we take dividends from profit. Like some of PAT for the year is reserved in Retained Earning while some is distributed to shareholders. This is why PAT is also known as Distributable profit. So why dividends are independent on Cashflow as they are given in cash. If business will not have profit so they will give bonus issues to make their shareholders happy. Dividends depending on cashflow would be better approach than on profit. If business will have Positive net cashflow in Statement of Cashflow so business should give dividends otherwise not.
John Moffat
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The retained earnings (including the profit after tax) is the most companies are legally allowed to distribute as dividend (and although I explain why in the lectures, that is really a legal point from Paper LW).
Obviously most companies do not distribute all their earnings as dividend – maybe because they do not have enough cash, but more likely because they want to grow the business and therefore use some of the cash to invest in more projects.
Very few companies will distribute all their cash as dividends. They would never be able to expand if they did.
maximus07
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