Taxation Position and Profitability & Liquidity

Profitability and liquidity

A company's capacity to pay dividend will be determined primarily with its capability to create adequate and stable profits and cash flow.If the company has liquidity difficulty, it may be unable to pay cash dividend and conclusion to paying stock dividend.

Taxation position of shareholders

Dividend payment is influenced with tax regime of a country as like in US cash dividend are taxable at source, although capital are tax exempt. The effect of tax differential is to discourage shareholders from wanting high dividends. So this is explained with tax differential theory.