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Dividend decisions
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  • 1. DIVIDEND DECISIONS
  • 2. INTRODUCTION
    • Dividend decision is the one of the decisions of Financial Mgt. It decides the proportion of equity earnings to be paid to equity share holders & the remaining proportion of net earning are retained in the firm
    • Payment of dividend is has two opposing effects.
    • It increases dividend there by stock price rise
    • It reduce the funds available for invt.
  • 3. DIVIDEND THEORIES
    • Relevance Theory :
    • > Walter’s Model
    • > Gordon’s Model
    • Irrelevance Theory :
    • > Miller & Modigliani Hypothesis ( MM Approach)
  • 4. Relevance Theory
    • According to relevance theory dividend decisions affects value of firm thus it is called relevance theory.
    • Walter’s Model’s theory :
    • This model is based on
    • 1) Return on investment OR Internal rate of return (r).
    • 2) Cost of capital OR Required rate of return.
    • Here, the model divides the firm into three groups
    • Growth firms
    • Normal firms
    • Declining firms
  • 5.
    • Gordon’s Model :
    • According to this model a firm share price is dependent on dividend pay out ratio.
    • > Assumptions :
    • The firm is all equity firm.
    • All investment projects are financed by exclusively retained earnings.
    • The rate of return firms is constant.
    • The cost of capital remains constant.
    • The firm has perpetual life.
    • There are no corporate taxes.
  • 6.
    • Criticism on MM Hypothesis :
    • Tax differential.
    • Floating cost.
    • Transaction cost.
    • Information asymmetry.
    • Institutional restriction.
    • Resolution of uncertainty.
    • Near v/s distinct dividend.
    • Desire for current income
    • Under pricing.
  • 7. IRRELEVANCE THEORY
    • MM Theory : Dividend policy have no effect on market price of share and the value of the firm.
    • Assumptions :
    • There are no taxes and there are no differences in taxes applicable to capital gains and dividends.
    • A firm has fixed investment policies.
    • There is no risk.
    • There are perfect capital market.
    • Investors behave rationally.
    • Information about the company is available to all without any cost.
    • There are no floatation & transaction costs.
    • No investor is large enough to effect the market price of shares.
  • 8. DIVIDEND POLICY
    • Types of dividend policy:
    • 1.Regular dividend policy
    • 2.Stable dividend policy.
    • a) Constant dividend
    • b) Constant payout ratio
    • c) Stable rupee dividend plus extra dividend
    • 3.Irregular dividend
    • 4.No dividend policy.
  • 9. FACTORS AFFECTING DIVIDEND POLICY
    • Legal restriction.
    • Magnitude & trend of earnings.
    • Desire & type of share holders.
    • Nature of industry.
    • Age of company.
    • Future financial requirement.
    • Government’s economic policy.
    • Taxation policy & Inflation.
    • Control objectives.
    • Requirements of institutional investors.
    • Liquid resources.
  • 10. FORMS OF DIVIDEND
    • Cash dividend.
    • Scrip or bond dividend.
    • Property dividend.
    • Stock dividend.