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DIVIDEND DECISIONS
INTRODUCTION <ul><li>Dividend decision is the one of the decisions of Financial Mgt. It decides the proportion of equity e...
DIVIDEND THEORIES <ul><li>Relevance Theory : </li></ul><ul><li>> Walter’s Model  </li></ul><ul><li>> Gordon’s Model </li><...
Relevance Theory  <ul><li>According to relevance theory dividend decisions affects value of firm thus it is called relevan...
<ul><li>Gordon’s Model : </li></ul><ul><li>According to this model a firm share price is dependent on dividend pay out rat...
<ul><li>Criticism on MM Hypothesis : </li></ul><ul><li>Tax differential. </li></ul><ul><li>Floating cost. </li></ul><ul><l...
IRRELEVANCE THEORY <ul><li>MM Theory :  Dividend policy have no effect on market price of share and the value of the firm....
DIVIDEND POLICY <ul><li>Types of dividend policy:   </li></ul><ul><li>1.Regular dividend policy </li></ul><ul><li>2.Stable...
FACTORS AFFECTING DIVIDEND POLICY <ul><li>Legal restriction. </li></ul><ul><li>Magnitude & trend of earnings. </li></ul><u...
FORMS OF DIVIDEND <ul><li>Cash dividend. </li></ul><ul><li>Scrip or bond dividend. </li></ul><ul><li>Property dividend. </...
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Dividend decisions

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Dividend decisions

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

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