full information on divident policy

1. MADE BY:-
SNEH LATA
DIVIDEND POLICY

2. INTRODUCTION
 Dividend is the part of profit of a company
which is distributed by the company among its
shareholders.
 It is the reward of the shareholders for
investment made by them in the share of the
wealth
 Dividend policy of the firm, thus affect both the
long term financing and the wealth of
shareholder.

3.  Dividend policy must be such a way that it
must reached in such a manner so as to
equitable apportion the distribution of profit
and retained earning

4. DIVIDEND DECISION AND
VALUATION OF FIRM
 Value of the firm is maximum when the
shareholder wealth is maximum.
 There is conflicting view regarding the impact
of dividend decision on valuation of firm.
 We will discuss two group of dividend policy
1. The Irrelevance Concept Of Dividend
2. The Relevance Concept Of Dividend

5. THE IRRELEVANCE CONCEPT OF DIVIDEND
 There are two approaches in Irrelevance
Concept Of Dividend
1. RESIDUAL APPROCH
2. MODIGLIANI AND MILLER APPROACH
(MM MODEL)

6. RESIDUAL APPROCH
 Inn this approach, dividend decision have no
effect in wealth of the shareholder or the price
of shares.
 In this theory dividend decision is merely a
part of financial decision. Because earning
available may be retained in the business for
re- investment if profitable investment is
available and if not available the it can be
distributed as dividend.

7. MODIGLIANI AND MILLER APPROACH
(MM MODEL)
 In theory it says that dividend policy has no
effect on market price of the shares and value
of the firm is determined by the earning
capacity of the firm or its investment policy.
 Splitting of earning between retention and
dividend may in manner firm likes.

8.  ASSUMPTION
 There is perfect capital market
 Investor behaves rationally
 Information about the company is available
to all without any cost
 No investor can affect the market price of
the share
 The firms rigid investment policy
 There is no risk and uncertain

9. The Relevance Concept Of Dividend
 There are two approaches in Relevance Concept
Of Dividend
A. WALTER’S APPROACH
B. GORDON’S APPROACH

10. WALTER’S APPROACH
 In this approach it shows that dividend
decision are relevant and affect the value of
the firm.
 In this approach it shows the dividend policy
has to factors which is affected by 2 element
.i.e. cost of capital (k) and rate of return (r).

11.  According to Prof. Walter
I. It r> k, the firm earn higher rate of return on its
investment than the required rate of return. So
firm should retain earning . Such firm are termed
as growth firm.
II. It r< k, the firm earn lower rate of return on its
investment than the required rate of return. So
firm should distribute their earning as dividend.
III. It r= k, the firm earn equal rate of return on its
investment as expected. In such firm there is no
optimum dividend pay out and the value of the
firm would not change with the change in
dividend rate.

12. GORDON’S APPROACH
 According to Gordon
I. It r> k, the firm earn higher rate of return on its
investment than the required rate of return. So firm
should retain earning . Such firm are termed as
growth firm.
II. It r< k, the firm earn lower rate of return on its
investment than the required rate of return. So firm
should distribute their earning as dividend.
III. It r= k, the firm earn equal rate of return on its
investment as expected. In such firm there is no
optimum dividend pay out and the value of the firm
would not change with the change in dividend rate.

13. DETERMINANTS OF DIVIDEND
POLICY
1. Legal restriction
2. Magnitude and trend of exchange
3. Desire and type of shareholder
4. Nature of industry
5. Age of the company
6. Future financial requirement
7. Control objective
8. Stability of dividends
9. Liquid resources
10. Inflation

14. TYPES OF DIVIDEND
POLICY
 Regular dividend policy: Payment of
dividend at a usual rate is termed as regular
dividend. The investors such as retired persons,
widows and other economically weaker persons
prefer to get regular dividends.

15. Advantages of regular dividend
policy
 It established the profitable record of the
company.
 It creates the confidence amongst the
shareholders.
 It aids in long-term financing and renders
financing easier.
 It stablises the market value of shares.

16.  Stable dividend policy: The term ‘stability
of dividend ‘ means consistency or lack of
variability in the stream of dividend
payments. It means payment of certain
minimum amount of dividend regularly. A
stable dividend policy may be established
in any of the following three forms:
 Constant dividend per share.
 constant pay out ratio.
 Stable rupee dividend plus extra dividend.

17. Advantages of Stable dividend
policy
 It is sign of continued normal operations of
the company.
 It stablises the market value of shares.
 It creates confidence among the investors.
 It provides a source of livelihood to those
investors who view dividends as a source
of funds to meet day to day expenses.
 It meets the requirements of institutional
investors who prefer companies with stable
dividends.

18. Dangers of stable dividend
policy
 Once a stable dividend policy is followed
by a company, it is not easier to change it.
 If the stable dividends are not paid to the
shareholders, the financial standing of the
company in the minds of investors is
damaged.
 If the company pays stable dividends
inspite of incapacity, it will be suicidal in
the long run.

19.  Irregular dividend policy:
 Uncertainity of earnings.
 Unsuccessful business operation.
 Lack of adverse effects of regular dividend
on the financial standing of the company.

20.  No dividend policy: A company may follow
a policy of paying no dividends presently
because of its unfavourable working capital
position or on account of requirements of
funds expansion and growth.

21. FORMS OF DIVIDEND
Dividends paid in the ordinary course of
business are known as profit dividends,
while dividends paid out of capital are
known as liquidation dividends. A
dividends which is declared between the
two annual general meeting is called
interim dividend. While the dividend which
is recommended to the shareholders at the
annual general meeting is known as final
dividend.

22.  Cash dividend: Payment of dividend in
cash results in outflow of funds and
reduces the company’s net worth, though
the shareholders get an opportunity to
invest the cash in any manner they desire.
 Scrip or Bond dividend: A scrip dividends
promises to pay the shareholders at a
future specific date. In case company does
not have sufficient funds to pay dividends
in cash, it may issue notes or bonds for
amounts due to the shareholders.

23.  Property dividend: Property dividend are
paid in the form of some assets other than
cash. They are distributed under
exceptional circumstances and are not
popular in India.
 Stock dividend: Stock dividend means the
issue of bonus shares to the existing
shareholders. If a company does not have
liquid resources it is better to declare stock
dividend.

24. BONUS ISSUE
A company can pay bonus to its
shareholders either in cash or in the form
of shares. Many a times, a company is not
in a position to pay bonus in cash inspite
of sufficient profits because of
unsatisfactory cash position. In such
cases, if the company so desires it can pay
bonus to its shareholders in the form of
shares by making partly paid shares as
fully paid .

25. EFFECTS OF BONUS ISSUE
 It amounts to reduction in the amount of
accumulated profits and reserves.
 There is a corresponding increase in the
paid up share capital of the company.

26. OBJECTS OF BONUS ISSUE
 To bring the amount of issued and paid up
capital in line with the capital employed so
as to depict more realistic earning capacity
of the company.
 To pay bonus to the shareholders of the
company without affecting its liquidity and
the earning capacity of the company.
 To make the nominal value and the market
value of the shares of the company
comparable.

27. FOLLOWING CIRCUMSTANCES
WARRANT THE ISSUE OF
BONUS SHARES
 When a company has accumulated huge
profits and reserves and it desires to
capitalise these profits so as use them on
permanent basis in the business.
 When there is a large difference in the
nominal value and market value of the
shares of the company.

28. ADVANTAGES OF BONUS
SHARES
 Tax Benefit – The receipt of bonus shares by the
shareholder is not taxable as income. The shareholder can
sell the new shares received by way of the bonus issue to
satisfy his desire for income and pay capital gain tax, which
are usually less than the income taxes on the cash
dividends.
 Conservation of Cash – The declaration of a bonus issue
allows the company to declare a dividend without using
cash that may be needed to finance the profitable
investment opportunities within the company.

29.  More Attractive Share Price – Sometimes the
intention of a company in issuing bonus
shares is to reduce the market price of the
share and make it more attractive to
investors. If the market price of a company
share is very high, it may not appeal to small
investors.

30. DISADVANTAGES OF BONUS
SHARES
 The reserves of the company after the
bonus issue decline and leave lesser
security to investors.
 The fall in the future rate of dividend results
in the fall of the market price of shares
considerably.
 The issue of bonus shares leads to a drastic
fall in the future rate of dividend as it is only
the capital that increases and not actual
resources of the company.

31. Difference Between
 Stock dividend means the issue
of bonus shares to the existing
shareholders of the company. It
amounts to capitalization of
earnings & distribution of profits
among the existing
shareholders without affecting
the cash position of the firm.
 Stock split means reducing
the par value of shares by
increasing the number of
shares proportionately. For
e.g. a share of Rs.100 may
be split into 10 shares of Rs.
10 each.
Stock DIVIDEND STOCK SPLIT

32.  The bonus issue and share split are similar
except for the difference in their accounting
treatment.
a. In case of bonus shares, the balance of the
reserves and surpluses account decreases due
to a transfer to the equity capital and the share
premium account. The par value per share
remain unchanged.
b. In case share split, the balance of equity
account does not change, but the par value per
share changes.

33. LEGAL ASPECTS OF PAYMENT
OF DIVIDEND
 The term dividend refers to that part of profits of a
company which is distributed by the company among its
shareholders. Legal provisions relating to declaration of
dividend are laid down in sec.250, 205A, 206, 207.
i. Sources of declaring dividend
a. Out of current profits – Dividend can be declared by a
company out of profits for the current year arrived at
after providing depreciation.

34. i. Out of past profits – Dividend can be declared out of the
undistributed profits of the company for any previous
financial year in accordance with the provisions.
ii. Declaration of dividend out of profits
If a company wants to declare dividend out of the
accumulated profits:
a. The rate of dividend should not exceed the average of the
rates at which dividend was declared by it in five years,
immediately preceding that year or 10% of its paid up
capital, whichever is less.
b. The total amount to be drawn for the declaration of dividend
from the accumulated

35. Profits should not exceed an amount equal to one- tenth of
the sum of its paid up capital and the amount so drawn
should first be utilized to set-off the losses incurred in the
financial year.
c. The balance of the reserves after such drawl should
not fall below fifteen percent of its paid up capital.
iii. Other provisions are
a. Dividend on equity shares can be paid only after
declaration of dividend on preference shares.
b. No dividend can be paid on calls in advance.
c. When dividend is declared by a company, it must be
paid by the company within 30 days of declaration of
dividend.

36. d. According to sec.205 of the company
act, no dividend shall payable except in
cash provided that nothing in this section
prohibits the capitalization of profits or
reserves of a company for the purpose
of issuing fully paid up bonus shares.
e. In the absence of any specific provision
in the articles of association of the
company, dividend is paid on the paid up
capital of the company.