GROUP MEMBERS

Mayuresh chaudhari Sayeed Khan Tushar Malde Naresh Patel Shweta Naik 10026 10001 10054 10020 1004

Introduction.
The term dividend refers to that part of profits of a company which is distributed by the company among its shareholders. Earnings retained or paid out to shareholders as dividends How much to pay out is one of most important decisions of a corporation Same decision faced by all firms, even small sole proprietorships Does owner reinvest in the firm to make it grow, or take the profits out?

Dividend Policy
What is It?
Dividend Policy refers to the explicit or implicit decision of the Board of Directors regarding the amount of residual earnings (past or present) that should be distributed to the shareholders of the corporation.
This decision is considered a financing decision because the profits of the corporation are an important source of financing available to the firm.
Chhachhi/BA 519/Ch. 18 4

Types of Dividends
1. Cash dividend Most common Portion of earnings paid out to shareholders Typically on an ongoing basis 2. Stock dividend Give shareholders new shares of stock in lieu of cash as a dividend Increases the number of shares outstanding Same effect as a stock split 3. Special dividend or stock repurchase Special dividend = a large, one time dividend Stock repurchase = distribute cash to shareholders by firm buying stock

Factors Affecting Dividend Policy

External factor General state of economy.
Legal restrictions.

Internal factor Desire of the shareholders.

Financial needs of the company. Desire of control.

Liquidity position .

Determinants of Dividend Policy

Requirements of fund for the future. Liquidity. Access to external source of financing Shareholder preferences. Difference in cost of Equity & Retain earning. Dilution of control. Taxes.

Theories Of Dividend Policy

Walters Model.
Gordon Model. Modigliani and Millers Model. ( M-M approach.)

Walters Model
Relationship between the firms internal rate of return (r) and its cost of capital (Ke). Internal rate of return (r) and cost of capital (Ke) of the firm remain constant. Ke < r..dividend payout is 0% Ke > r..dividend payout is 100%

Market value of share will be high even declared low dividend.

Walters Model
Assumption
All financing is done through retain earning no external sources. The Firm business risk is constant. Firm has perpetual long life. DPS & EPS remain constant.

Walters Model Formula

The formula used by Walter to determine the market price per share is : D+ r(ED) P = K K Where, P = Market price per share D = Dividend per share E = Earnings per share r = Internal rate of return (Actual capitalization rate) K = Cost capital (External capitalization rate)

Gordon Model
The market value of a share is equal to the present value of future stream of dividends. when r > k, the price per share increases as the dividend payout ratio decreases. when r = k, the price per share remains unchanged and is not affected by dividend policy. when r<k, the price per share increases as the dividend payout ratio increases.

Gordon Model
Assumption
The firm is an all equity firm. No external financing is available or used. Retained earnings represent the only source of financing investment programmers. The rate of return on the firms investment r, is constant. Financial Management Decisions. The retention ratio, b, once decided upon is constant. Thus, the growth rate of the firm g = br, is also constant. The cost of capital for the firm remains constant and it is greater than the growth rate i.e. k > br. The firm has perpetual life. Corporate taxes do not exist.

Gordon Model
P= D Keg
Where, P = Market price per share D = Dividend per share Ke = Cost of equity. G = growth rate B* R. B = tax rate. R = rate of return.

M-M Approach
It maintain the dividend policy has NO effect on the share price.
Dividend decision irrelevant. The investment policy to which the firm can increase its earning & value of the firm.

M-M Approach
Assumption
Perfect market. All investor are rational. Information available free of cost. No transaction cost. Security are infinity divisible. There are no taxes.

M-M Approach
Po = D1+ P1 (1+ K)
Where, Po= Current Market price. D1= Dividend to be paid next year. Ke = Cost of equity. P1= MPS after next year price.

Chhachhi/BA 519/Ch. 18

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