TYBMS SEM VI : STRATEGIC FINANCIAL MANAGEMENT

1.Dividend Policy
2.Extensible Business Reporting Language (XBRL)
3.Capital Budgeting
4.Capital Rationing
5.Shareholder Value Creation
6.Corporate Governance
7.Corporate Restructuring
8.Financial Management in Banking Sector
9.Working Capital financing
 1. Dividend Policy
• Earnings and Dividend :
Earnings per share and dividends per share
are both reflections of a company's
profitability. Earnings per share is a gauge
of how profitable a company is per share of
its stock. Dividends per share, on the other
hand, measures the portion of a
company's earnings that is paid out to
shareholders. It is a distribution of profits
 by a company to its shareholders. When a
company earns a profit or surplus, it is able
to pay a proportion of the profit as a
dividend to shareholders. Any amount not
distributed is taken to be re-invested in the
business (called Retained Earnings).
• LIQUIDITY : Liquidity has a direct relation with the dividend policy. Many a times, company
having high profit, may have majority of profit blocked in working capital or it may acquired
assets. In that case its liquidity is poor. In that case company should pay less dividend. High
dividend payment is possible only if company has good earning and sound liquidity.
• Investment Opportunities : If profitable invt. opportunities are available, dividend payout is
low and maintaining sufficient surplus funds for any further project or expanding business
etc.
• Debt Obligations: The organization which has leveraged funds through debts need to pay
interest on borrowed funds. Therefore, such companies cannot pay a fair dividend to its
shareholders.
• Earnings Stability: When the earnings of the company are stable and show profitability, the
company should provide dividends accordingly.
• Past Dividend Rates: There should be a steady rate of return on dividends to maintain
stability; therefore previous year’s allowed return is given due consideration.
• Control Policy: When the company does not want to increase the shareholders’ control over
the organization, it tries to portray the investment to be unattractive, by giving out fewer
dividends.
• Shareholders’ Expectations: The investment objectives and intentions of the shareholders
determine their dividend expectations. Some shareholders consider dividends as a regular
income, while the others seek for capital gain or value appraisal.
• Nature and Size of Organization: Huge entities have a high capital requirement for expansion,
diversification or other projects. Also, some business may require enormous funds for working
capital and other entities require the same for fixed assets. All this impacts the dividend policy
of the company.
• Company’s Financial Policy: If the company’s financial policy is to raise funds through equity, it
will pay higher dividends. On the contrary, if it functions more on leveraged funds, the dividend
payouts will always be minimal.
• Impact of Trade Cycle: During inflation or when the organization lacks adequate funds for
business expansion, the company is unable to provide handsome dividends.
• Borrowings Ability: The company’s with high goodwill has excellent credibility in the capital as
well as financial markets. With a better borrowing capability, the organization can give decent
dividends to the shareholders.
• Legal Restrictions: In India, the Companies Act 1956 legally abide the organizations to pay
dividends to the shareholders; thus, resulting in higher goodwill.
• Corporate Taxation Policy: If the organization has to pay substantial corporate tax or dividend
tax, it would be left with little profit to pay out as dividends.
• Government Policy: If the government intervenes a particular industry and restricts the issue of
shares or debentures, the company’s growth and dividend policy also gets affected.
• Divisible Profit: The last but a crucial factor is the company’s profitability itself. If the
organization fails to generate enough profit, it won’t be able to give out decent dividends to the
shareholders.
Types of Dividend :
1. Interim Dividend : Interim dividend is the dividend, which is announced and paid before the
company has issued its annual financial statements. It is declared by the board of directors. The
company might have the policy to pay dividend more than once in a year. So the dividends
 announced in between the two annual general meetings are considered Interim Dividend
2. Final Dividend : It is the dividend announced by the Company after the preparation of the final
accounts and usually announced during the Annual General Meeting of the Company . Final
Dividend is generally more significant than the interim dividend. It is because the Company tends
to be little conservative during the financial year until it gets the annual accounts, i.e., revenues
 and expenditures for the year.
•After the Company knows its profits for the financial year, it chooses to retain some portion for
future business needs while remaining is distributed amongst the shareholders as the final
dividend.
3.Dividend on Preference shares : Preference shares are often referred to as preferred stock. They
are shares that belong to a company's stock with dividends that are paid to shareholders before
the issuing of common stock dividends. Most of the preferred shares have a fixed dividend.

Types of Dividend Policies :

1. Regular Dividend Policy: Payment of dividend at the usual rates. The investors such as the
middle class families, retired persons and institutional investors prefer this type of dividend
policy. However it should be remembered that regular dividend can be maintained only by
companies of long standing and stable earnings.
2. Irregular Dividend Policy : company follows due to lack of liquid funds, uncertainty of future
earnings, unsuccessful business operations etc. When there is no certainty as to whether
dividend will be paid in a year or not and how much of dividend will be paid, the company is
said to follow an irregular dividend policy. Investors who expect a company to pay a certain
amount as dividend every year may not want to invest in such a company.
3. Stable Dividend Policy: The term stability of dividend means consistency or lack of variability in
the stream of dividend payments, even though the amount of dividend may fluctuate from year
to year. The company decides to pay a certain amount of dividend every year, consistently,
whether more or less.
Some investors may be more interested in a source of income for today rather than capital
appreciation. This serves as an assurance to those investors who depend on dividend as a .source
of income. Rate of dividend is not fixed but amount of dividend may be paid every year.
4. No Dividend Policy: No dividend policy followed ,when funds are kept for the future growth
and expansion or unfavourable working capital position. Company may decide not to pay any
dividend at all. If the profits of a company are reinvested in the business, it may result in growth
and better profits in future.
Dividend stripping : It is a attempt to reduce the tax liability, by an investor who invests
in securities (i.e. shares, stock or debentures etc.) and units (Mutual fund units or units of UTI),
shortly before the record date and getting a tax free dividend/income, and exiting after the
record date at a price lower than the price at which, such securities/units were purchased and
incurring a short-term capital loss.
The strategy behind dividend stripping is a two way strategy wherein-
•Investor gets tax free dividend (i.e. exempted u/s 10(34)/10(35))
•Incurs Short term capital loss (i.e. allowed to be set off and carry forward)
Record date:- Date fixed by a company or mutual funds for the purpose of entitlement of holders
of securities or units, to receive dividend or other income.
Modigliani-Miller theory (Approach to cost of capital & Capital structure

It states that there is no correlation between cost of capital and Debt equity ratio . This approach
states that the average cost of capital of any firm is independent of its capital structure. The value
of the firm and cost of capital is the same for all the firms irrespective of the proportion of debt
included n a firms capital structure.
Assumptions :
1. There are no transactions costs and There are no flotation costs
2. None of the investors can affect the stock price
3. Both public and private information are available for any investor
4. There are no limitations on buying or selling stock
5. All companies within the same class have the same business risk
6. The cost of borrowing is fixed (kd) and always lower than the required rate of return on
equity (ke), i.e., kd < ke
7. All investors have the same estimate of the expected return for each stock
8. Companies distribute all net income to dividends
9. There are no taxes
 Modigliani- Miller Theory on Dividend Policy
Modigliani – Miller theory was proposed by
Franco Modigliani and Merton Miller in
1961. The investment decision is, dependent
on the investment policy of the company and
not on the dividend policy. Dividend policy
has no effect on the share price of the firm If
any profitable investment opportunities are
available then profit are invested in profitable
investment opportunities. The investment
decision is, thus, dependent on the
investment policy of the company and not on
the dividend policy.
2) Dividend Growth Model : Gordon’s Growth Model. When r > discount rate, MPS
increases as dividend ratio decreases and vice versa. MPS remains unchanged when r =
cost of capital.
3) Walter’s Model : In the long run the MPS reflect only the present value of future
expected dividends.
3) CAPM = The expected return on individual security is a combined function of risk free
return plus market return dependent of the risk factor.
4) Myron Gordon and John Lintner developed the bird-in-hand theory as a counterpoint
to the Modigliani-Miller dividend irrelevance theory. The dividend irrelevance theory
maintains that investors are indifferent to whether their returns from holding stock arise
from dividends or capital gains.
5) The tax differential view of dividend policy : is the idea that capital gains are better
than dividends because the tax rate on capital gains is lower than the tax rate on
dividends.
6) Residual Theory : A residual dividend policy means companies use earnings to pay for
capital expenditures first, with dividends paid with any remaining earnings generated.