Roll No: MI 2018

Introduction
o Once a company makes a profit, they
must decide on what to do with those
profit.
o Company decides to pay dividend to
shareholders
o It also depends on the situation of the
company now and in future.
Dividend policy
Dividend is defined as “a distribution to
shareholders out of profits or reserves
available for this purpose”. It also refers to
that potion profit after tax. It is the return
that shareholders get on their investment.
Traditional policy
o This model lays down a clear emphasis on the relationship
between the dividends and the stock market.
o This model establishes the relationship between market
price and dividends using a multiplier.
o P/E ratio are directly related to the dividend payout ratio
o Formula

P=M(D+E/3)
 LIMITATIONS
 P/E ratio are directly related to the dividend payout ratio
is not true for a firm’s whose payout is low but its
earnings are increasing
 This approach does not hold good for those firm whose
payout is high but have slow growth rate.
 There will be few investors who would prefer the
dividends to the certain capital gains and a few who
would prefer low taxed capital gains.
 These conflict factors have not been properly explained
by traditional approach.