Final answer:
The dividend decision is termed an internal financing decision because it entails the allocation of a company's generated profits, either to distribute as dividends or to re-invest in the company's growth, thus avoiding the need for external financing. The board of directors usually makes these financial decisions, and the approach differs between private and public companies.
Step-by-step explanation:
The dividend decision is known as an internal financing decision because it involves using a company's own profits to finance its operations and growth, without seeking additional funds from external investors. When a company generates profits, it has the option to either distribute some of these profits as dividends to shareholders or to re-invest them back into the company. This re-investment can be used for various purposes such as purchasing new equipment, expanding operations, or pursuing new business opportunities, effectively serving as a source of internal financing.
Decisions regarding issuing stock, paying dividends, or re-investing profits are typically made by the company's board of directors. This separation in decision-making is more evident when we consider private versus public companies. Private companies have more discretion and fewer shareholders to answer to, allowing them more flexibility in their decisions. Public companies, on the other hand, must consider the expectations and interests of a larger body of shareholders and comply with market regulations.
Overall, a company may choose to rely on internal financing via dividend decisions to maintain control, avoid incurring debt, or prevent dilution of ownership that could occur with external financing options like issuing new stock.