Dividend Decision

and Theories
 CONCEPT OF DIVIDEND

• The term dividend in normal usage refers to that portion of

profits after tax, which is distributed among the shareholders
of the firm.

• Dividends are periodic cash payments by the company.

• A company may have a preference as well as equity share

capital and dividends may be paid on both the type of capitals.
• Dividend paid represents a cash flow and the dividend
decision is regarded as a financing decision.

• Dividend decision is treated as a wealth maximization

decision.

• Payments of dividends to shareholders has a strong influence

on the market price of the shares.
 TYPES OF DIVIDEND
The types of dividend are as follows:
• Interim Dividend
• Final Dividend
• Stock Dividend
• Scrip Dividend
 LEGAL DECISION ON DIVIDENDS
The dividend decision is based on the legal provisions under the
Companies Act 1956, Companies Rules 1975 provide that before dividend
declaration a percentage of profit as specified below should be transferred
to the reserves of the company:

• Where the dividend proposed exceeds 10% but not 12.5% of the paid up
the capital, the amount transferred to the reserves shall not be less than
2.5% of the current profits.
• Where the dividend proposed exceeds 12.5% but not 15%, the amount
transferred to the reserves shall not be less than 5% of the current
profits.
• Where the dividend proposed exceeds 15% but not 20%, the amount
transferred to reserves shall not be less than 7.5% of the current profits.
• Where the dividend profits exceeds 20%, the amount
transferred to the reserves shall not be less than 10% of the
current profits.
• Companies can pay only cash dividends and bonus shares.
• Dividends can be paid out of the firms current profits after
providing for depreciation and transferring to reserves.
• The rate of the dividend declared shall not exceed the average
of the rates at which dividend was declared by it in 5 years
immediately preceding that year or 10% of its paid up capital,
whichever is less.
 DIVIDEND POLICY
• Dividend policy refers to the policy relating to the
distribution of profits as dividends.
• The important aspect of dividend policy is to decide about
the earnings to be distributed to the shareholders and
amount to be retained in the firm.
• Dividend policy adopted by the firm should be one, which
helps in maximizing its contribution towards increasing the
wealth of the shareholders.
• A firm’s dividend policy includes two dimensions:
a) Dividend pay out ratio
b) Stability of dividends
 NATURE OF DIVIDEND POLICY
• Tied up with retained earnings
• Decision making and problem solving
• Impact on shares
• Optimal dividend policy
 OBJECTIVES OF DIVIDEND POLICY
• Wealth maximization
• Sufficient financing
BASIC ISSUES INVOLVED IN DIVIDEND POLICY

• Cost of capital
• Realization of objectives
• Shareholder’s group
• Realize of corporate earnings
 FACTORS INFLUENCING DIVIDEND POLICY
• Legal issues
• Size of the earnings
• Investment opportunities and shareholder’s preference
• Liquidity position
• Management’s attitude towards control
• Capital market
• Contractual restrictions
• Profit rate and stability of earnings
• Control
• Inflation
 TYPES OF DIVIDEND POLICY
A company may follow a wide variety of
dividend policies. They are as follows:
• Stable dividend policy
• Policy of no immediate dividends
• Policy of regular and extra dividend
• Policy of regular bonus shares
• Policy of regular dividends plus bonus shares
• Policy of irregular dividends
THANK YOU!
PRESENTED BY:
Jayanta Handique
Nilesh Bardhan
Raghav Bhojanna
Sagar Jain
Saorav Das