Abstract: A Corporation with the aim of maximizing the per share market price should maximize the sum of current dividends paid out and the market price of the stock after the payment of dividends. This sum ultimately maximizes the owners` wealth. If a firm attempting to maximize market share prices only it moves toward the goal of stockholder-wealth maximization but certainly may not achieve it as share price maximization is not a sufficient condition for stockholder-wealth maximization. Corporate dividend policy arises the question of how much of its earnings a firm should pay to the shareholders. Alternatively, retaining portion may be reinvested for the future earnings prospects of the firm. Retained earnings imply no concurrent tax liabilities. On the other hand, dividends are taxed at a flexible rate as applicable for individual shareholders. In spite of the tax treatment imposed by the government, corporations distribute a fraction of their earnings as dividends. By reducing their dividends, firms may raise the level of investment and therefore depress the rate of return on investment. The return on investment is made up of both capital gains (or losses) and dividends. It is assumed that the dividends and capital gains are equally valuable to the investors though this may not always be the case as tax treatments sometimes favor capital growth over dividends. But any firm may increase its retained earnings without having return on capital to partly or wholly replace debt finance. A general question may arise in the mind of the shareholders that the corporate dividend policy affects their wealth. If an increase in dividends increases the value of the firm, the shareholders will prefer to take earnings as dividends and new investments should be financed through the sale of new securities. But financial theorists find that dividend policy does not impact on share value although it affects the firm`s willingness to undertake its investment opportunities and thus impacts the firm`s value. However, the corporate owners want a share of the profits their firm earns. Considering the shareholders` demand a firm may take dividend decision recognizing the impact of the same on the shareholders` wealth. For sure, theoretically, shareholders are indifferent between receiving corporate earnings as dividends and having a capital appreciation. Hence, the corporate dividend policy should have a relatively direct bearing on cyclical fluctuations and longer term growth trends in the economy. In this paper we critically analyze the factors influencing the allocation of firm`s earnings among taxes, dividends, and retained earnings. This paper also attempts to strive at the relationship between dividends and stock prices along with a firm`s fundamental goal of maximizing wealth of the shareholders.