1. LECTURES ON FINANCIAL
MANAGEMENT
WORKING CAPITAL MANAGEMENT
&
DIVIDEND DECISIONS
By
Suku Thomas Samuel
Department of Management
Kristu Jayanti College

2. SCOPE OF THE CHAPTER
•Meaning & Concepts of Working Capital
•Factors affecting WC requirements
•Meaning & concepts of Dividend
•Forms of dividend
•Dividend policies
•Factors influencing dividend policy

3. WORKING CAPITAL
Meaning:
• Capital of a business which is used in its day-to-day
trading operations
• Calculated as the current assets minus the current
liabilities.
“ Working Capital refers to a firms investment in short
term assets – cash, short term securities, accounts
receivables and inventories”

4. NEED FOR WORKING
CAPITAL???
•Sustain business activity
•Meet routine obligations
•Meeting contingency situations
•Explore new business opportunity
•Measure of business solvency

5. OPTIMAL WORKING CAPITAL
Business must have optimal level of
working capital
– Excess working capital – fund
remains unutilized
– Inadequate working capital –
unable to met contingencies

6. COMPOMENTS OF WORKING CAPITAL
MANAGEMENT
• Managing cash flows of a business
• Ensuring adequate inflows and outflows
Cash
Management
• Management of stores, warehouse etc. including raw materials and
finished goods.
• Decides cash levels.
Inventory
Management
• Credits given to vendors, retailers etc.
• Decides sales volumes and cash health.
Receivable
Management

7. DETERMINANTS OF WORKING
CAPITAL
Nature & Size of business
Operating cycle
Production policy
Credit policy
Growth prospects
Seasonal requirements

8. DIVIDEND
• Portion of the profit distributed to shareholders
• Periodic payments to shareholders of the firm out of profits
earned
• Return earned by shareholders for contributing capital
“A dividend is a distribution of a portion of a company's
earnings, decided by the board of directors, to a class of its
shareholders.”
Dividend decision refers to deciding the amount of profit that
needs to be distributed.
Types of Dividend – Final & Interim

9. FORMS OF DIVIDEND
Cash
Dividend
Scrip
Dividend
Stock
Dividend
Property
Dividend

10. FORMS OF DIVIDEND
Cash
Dividend
• Payment made by a company out of
its earnings to investors in the form of
cash.
• Provide shareholders with regular
income on their investment.
• Taxable income for the investor.

11. FORMS OF DIVIDEND
• Payments made to the shareholders as
incremental stocks on their existing
holding.
• Increase the number of shares of
stock outstanding.
• Accumulation of non-cash profits.
• EPS of the shares will reduce.
Stock
Dividend

12. FORMS OF DIVIDEND
Scrip
Dividend
• Offers shareholders an option to
receive dividends in two different
forms: cash or additional company
stock.

13. FORMS OF DIVIDEND
• Payments made in form of physical
assets - inventories, equipment or
real estate etc.
• Value of the asset has to be restated
at the fair value while issuing a
property dividend.
Property
Dividend

14. DIVIDEND POLICY
Residua
l
Dividen
d
Regular
Dividen
d
Stable
Dividen
d
Irregula
r
Dividen
d
No
Dividen
d
Policy a company uses to structure its dividend pay-out to
shareholders.

15. FACTORS – DIVIDEND POLICY
Availability
of liquid
funds
Financial
needs of the
firm
Investment
opportunities
Economic
conditions
Nature and
size of
business
Stability of
earning
Access to
capital
market
Tax
implications
Requirement
s of
shareholders

16. DIVIDEND THEORIES
Decision to pay dividend to the investor can looked
at with two perspectives
•Decision to pay divided impacts share price
•More dividend, more is the appreciation
Wealth
Maximization
•Loss of retained earnings portion of profit
•Reduction of fund for investment
Long Term
Finance

17. DIVIDEND THEORIES
Based on impact of dividend on value of the firm,
there are 2 theories
Relevance Theory
• Choice of the dividend policy affects the value of a firm
• Change in the dividend payout ratio will be followed by a change in the market value of the firm
• Determine an optimum payout ratio
• Optimum payout ratio is that ratio which gives highest market value per share
• Walter’s Model & Gordon’s Model
Non Relevance Theory
• Dividend decision does not affect the wealth of shareholders
• Value of a firm depends solely on its earnings power resulting from the investment policy
• Split between dividends and retained earnings does not affect value
• Residual Theory & MM Approach

18. THANK YOU