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Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
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Dividend Policy -B.V.Raghunandan

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liberal and conservative dividend policies and theories of dividend policies for valuation of shares

liberal and conservative dividend policies and theories of dividend policies for valuation of shares

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  • 1. Chapter X<br />Dividend Policies<br />
  • 2. Dividend<br />The return given to the shareholders on their investment<br />First Stage in Dividend Policy: Conservative<br />Second Stage: Liberal<br />Third Stage: No Dividend Policy<br />India is in the second stage right now<br />
  • 3. Factors Determining Dividend Policy<br />Company Policy<br />Stability in Earnings<br />Liquidity of the Co.<br />Past Dividend Rates<br />Projects under Consideration<br />Market Expectation<br />Taxation<br />Legal restriction<br />Independent Opportunities<br />Restrictions of FIs<br />Nature of Business<br />Cost of Capital<br />Phase of Trade Cycle<br />Accumulated Reserves<br />Co’s Growth Needs<br />Bonus Issue<br />
  • 4. Types of Dividend Policies<br />Conservative Dividend Policy<br />Liberal Dividend Policy<br />
  • 5. Conservative Dividend Policy: Merits<br />Good Treasury Mgt.<br />Stability in Dividend<br />Provision for Contingency<br />Organic Growth<br />Inorganic Growth<br />Modest Expectation<br />Taxation<br />Higher Book Value<br />Value Unlocking<br />Research Oriented Companies<br />
  • 6. Demerits of Conservative Dividend Policy<br />Lesser Image as a Creator of value for the Shareholders<br />Book Value will be far more than Market Value of the Shares<br />Accessing Capital Market becomes Difficult in the Future<br />Lesser Liquidity for the Shares<br />
  • 7. Liberal Dividend Policy<br />Handsome Dividend<br />A Number of Interim Dividends within a Year<br />Regular Issue of Bonus Shares<br />Special dividends on Important Occasions<br />Taking Care of Enhancing Shareholder Value as much as maximising Profits of the Company<br />
  • 8. Merits of Liberal Dividend Policy<br />Good Image<br />Shareholder Satisfaction<br />Liquidity of the Scrip<br />High Market Price<br />Growth Driven Policy<br />Accessing the Market<br />Raising Finance Globally<br />Constant Innovation<br />
  • 9. Demerits of Liberal Dividend Policy<br />Difficult Treasury Management<br />Lack of Stability in Dividend Payment<br />Affecting Growth Prospects<br />Insatiable Appetite of Shareholders<br />High Dividend Tax<br />
  • 10. Bonus Shares<br />Stock Dividend<br />Capitalising the Reserves<br />Given as a ratio 1:2<br />Conserves Cash<br />For the Shareholder, tax liability is less as stock dividend is not treated as income<br />
  • 11. Benefits of Bonus Shares to the Company<br />No cash Outflow<br />Higher Liquidity<br />Good Image<br />Higher Market Capitalisation<br />Reduction in Rate of Dividend<br />No Dividend Tax<br />Undercapitalisation<br />
  • 12. Benefits of Bonus Shares to the Shareholders<br />Higher Holding<br />Partial Liquidation<br />Taxability<br />Higher Liquidity<br />Higher Future Dividend<br />
  • 13. Impact of Bonus Shares<br />On Balance Sheet: Asset side not affected, Reserves come down and Share Capital goes up-Net worth does not change<br />On Share Price: Immediate high, subsequent lower and higher in the long term<br />On EPS: Gets reduced- Suggestible when the operating profit is expected to go up<br />
  • 14. Bonus Shares & SEBI Guidelines<br />Provision in Articles of Association<br />Increasing Authorised Capital<br />Out of Free Reserves/Share Premium<br />Not Out of revaluation Reserve<br />Only on Fully Paid Shares<br />Not in Lieu of Dividend<br />Implementation within six months<br />No Default on Financial Obligations<br />Not in one year of Public Issue/Rights Issue<br />Applicable to Listed Companies<br />
  • 15. Dividend Models<br />Walter’s Model<br />Gordon’s Model<br />Modigliani-Miller Model<br />
  • 16. Walter’s Model<br />James Walter & his Article, ”Dividend Policy: Its Influence on the value of the Firm”<br />Growth Firm: ROI &gt; k-optimal dividend is 0%<br />Normal Firm: ROI =k, Any rate of dividend<br />Declining Firm: ROI &lt; k , 100% Pay-Out Ratio<br />
  • 17. Assumptions of Walter’s Model<br />Only Two Sources of Finance: Equity Shares and Retained Earnings<br />ROI is constant from one year to another<br />K is constant from one year to another<br />Firm has an infinite life<br />
  • 18. Computation of Market Value of Shares<br /> Where <br /> P=Market Price of Equity<br /> R=Rate of Return<br /> K=cost of capital<br /> E=Earnings per Share<br /> D=Dividend per Share<br />
  • 19. Problem No. 1<br />The National Sports Company with an EPS of Rs.11 and a cost of capital at 13%, achieved a Return on Investment at 18%. As per Walter’s Model, what would be the optimum pay-out ratio? What would be the share price at this ratio?<br />
  • 20. Problem No.2<br />The earning per share of a company are Rs.8.It has an internal rate of return of 14% and the capitalisation of its risk class is 12%. If Walter’s Model is used,<br />What should be the optimum pay-out ratio of the firm?<br />What would be the price of its share at this pay-out ratio?<br />How shall the price of the share be affected, if 20% pay-out ratio was employed?<br />
  • 21. Percentage of Dividend & Dividend Pay-Out Ratio<br />If Dividend is given as a percentage, it should be calculated on the face value.<br />If it is given as a pay-out ratio, it should be calculated on the EPS<br />
  • 22. Problem No.3<br />Company A has achieved an EPS of Rs.8 for the year2007-08. What is the Dividend per Share if, <br />(a) 25% dividend is declared on the share of Rs.10 face value <br />(b) dividend pay-out ratio is 25%<br />
  • 23. Problem No.4<br />Fairever Cosmetics achieved an EPS of Rs.9 per share on its equity share of Rs.10 each., for the year 2006-07.It achieved a Return on Investment @ 14% with a cost of capital @ 16%. What is the ideal pay-out ratio? <br /> At that ratio, calculate the market value of share of the firm. <br /> If Board of Directors recommend a Dividend of Rs.4, what would be the market price of share of the firm?<br />
  • 24. Problem No.5<br />For the year 2006-07, Sellwell Ltd., achieved an EPS of Rs.9. Its cost of capital is 11% and Rate of Return is 14%. <br /> Determine its market price when the dividend pay-out ratio is (a) o% (b) 25% © 50% (d) 100%<br />
  • 25. Problem No. 6<br />Trywell Ltd., achieved an EPS of Rs.12 on its equity shares of Rs.10. The cost of capital of the company was 7% while the rate of return was 4%.<br /> Calculate the market price of the share if the Dividend Pay-out ratio was (a) 0% (b) 20% © 40% (d) 80% (e) 100%<br />
  • 26. Problem No.7<br />Consider the following data:<br /> Growth Normal Declining<br /> Firm FirmFirm<br />ROI 17% 18% 19%<br />K 15% 18% 20%<br />EPS (Rs) 6 6 6<br />Calculate the market price of shares of the<br />firms if the pay-out ratio is 20%, 45% or 70%.<br />Also comment on it. <br />
  • 27. Criticisms of Walter’s Model<br />Only zero debt companies have equity and retained earnings as the only two sources of finance<br />ROI will not be constant<br />K also will not remain constant<br />
  • 28. Dividend Capitalisation Model<br />Myron J. Gordon concurred with Walter in Dividend being relevant to Market price of Share<br />He differed in advocating growth as the driver of the market price<br />Growth is the product of retention ratio (b) and Rate of Return (R)<br />
  • 29. Assumptions of Gordon’s Model<br />Only Equity and Retained Earnings are the only sources of finance<br />R is constant from one year to another<br />Taxes do not exist<br />K is also constant<br />The Firm has a perpetual life <br />
  • 30. Computation of Market Price<br />
  • 31. Miller-Modigliani Dividend Model<br />Merton Miller & Franco Modigliani presented a paper in 1958 and argued that Dividend <br /> was irrelevant in determining the price of the share<br /><ul><li>It was the Investment policy and earnings of the firm that determined the share price
  • 32. In 1961, an Article was published by them, which came to be known as Irrelevance Theory</li></li></ul><li>Arbitrage Process<br />Price may go up post declaration of dividend<br />After the payment of dividend, the firm may have to access the capital market for the future requirement<br />This will bring down the price of the shares to the previous levels<br />The Theory impacted the capital market so much that nearly 70% of American Corporations became ‘No Dividend’ Corporations<br />
  • 33. Assumptions<br />Perfect Capital Markets:<br /> - all the investors are rational<br /> -price sensitive information is available to all<br /> the investors simultaneously<br /> -securities are infinitely divisible<br /> - no single investor is big enough to<br /> influence the price<br />2. Non-Existence of Taxes<br />3. Constant Investment Policy<br />4. Forecasting Ability<br />
  • 34. Computation of Share Price<br /> Where <br /> Po = Price at the beginning<br /> P1 = Price at the end<br />ke = Cost of Equity<br /> D = Dividend per Share<br />
  • 35. Exercise-page No.289<br />17. The share price of TVS Electronics Ltd. was ruling at Rs. 57.60. The Board of Directors declared a dividend of Re. 0.70 per share of Rs. 10. If cost of equity is 3%, calculate the share price after declaration of dividend using Miller Modigliani Dividend Model.<br />
  • 36. Exercise-Page No.289<br />16. Cost of Equity of VIP Industries Ltd. was 5% and the price of equity share was Rs. 122.60. The company declared a dividend at 20% on its equity shares having the face value at Rs. 10. What will be the share price after the declaration of dividend? <br />18. Triumph Engineering Ltd had 5,000 equity shares of Rs. 100 each. During a financial year, its cost of equity was 17%%. Using Miller - Modigliani model, decide what will be the price of the share, if no dividend is declared? If a dividend of Rs. 23 per share is declared, what will be the share price?<br />
  • 37. Exercise-Page No.289<br />19. United Pharma Ltd. had 3,00,000 outstanding equity shares of Rs.10 each on Jan 1,2007. The company now intends to pay Rs.6 per share for the current year. It belongs to a risk class whose appropriate capitalisation rate is 9%. Determine the price of the company’s share using Modigliani-Miller model,<br /> (i) when dividend is declared<br /> (ii) when no dividend is declared.<br />19. United Pharma Ltd. had 3,00,000 outstanding equity shares of Rs.10 each on Jan 1,2007. The company now intends to pay Rs.6 per share for the current year. It belongs to a risk class whose appropriate capitalisation rate is 9%. Determine the price of the company’s share using Modigliani-Miller model,<br /> (i) when dividend is declared<br /> (ii) when no dividend is declared.<br />19. United Pharma Ltd. had 3,00,000 outstanding equity shares of Rs.10 each on Jan 1,2007. The company now intends to pay Rs.6 per share for the current year. It belongs to a risk class whose appropriate capitalisation rate is 9%. Determine the price of the company’s share using Modigliani-Miller model,<br /> (i) when dividend is declared<br /> (ii) when no dividend is declared.<br />
  • 38. Exercise-Page No.292<br />17. Two chemical companies A Ltd. and B Ltd. had equity shares priced at Rs. 300 each. During the financial year 2006-07, each one made a net profit of Rs. 430 crores. Cost of equity is the same for both the companies at 16%. A Ltd. decided to declare a dividend at Rs. 7 per share and B Ltd. decided not to declare any dividend.<br />Using Miller-Modigliani hypothesis,<br />a) Calculate the share price of A Ltd. after dividend declaration<br />b) Calculate the share price of BLtd. after the results<br /> c) Is there any difference in the total shareholder wealth between the two companies?<br />
  • 39. Exercise-Page No 292<br />16. The following seven engineering companies undertake turn-key projects in India. Their financials for 2004-05 are given below. All the companies have Rs. 10 as the Face value of share of a Company<br /> P0 D ke (%)<br />ABG Heavy Industries Ltd 264 1.50 4.4<br />Engineers India Ltd 823 7.50 2.4<br />Hindustan Dorr-Oliver Ltd 813 1.20 2.2<br />MC. NallyBharath Ltd 130 0.30 2.3<br />Petronet Engineering Ltd 168 1.00 5.9<br />PSL Ltd 251 4.50 4.14<br />Sanghvi Motors Ltd. 840 5.00 2.1<br />Using Modigliani - Miller hypothesis, calculate the market price of shares after the declaration of dividend.<br /> <br />
  • 40. Exercise-page No.292<br />18. Apply Modigliani - Miller hypothesis and determine the share prices of the following companies after the declaration of dividend.<br />Problem No. 19<br />
  • 41. THANK YOU<br />

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