The presentation shows the importance of Dividend and its effect on Valuation of firm. It covers various theories of dividend

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DIVIDEND AND VALUATION
Financial Management in Industry (SML412)

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INTRODUCTION
Dividend- Profit
distributed to
shareholders
Maintaining cash
flow
Dividend payout
ratio= DPS/ EPS
*100
Dividend
Dates
Declaration
Date
Record
Date
Ex-Date
Payment
Date
Determinants
of Dividend
D/P ratio
Stability
Constraints &
restrictions
Owner
considerations
Capital market
Inflation

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CONCEPTS
Near Vs Distant Dividend
Preference for Current Income
Transaction and Inconvenience Costs
Information content of Dividend
Institutional Restrictions
Flotation Cost
Tax Effect
Market Imperfection

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Dividend
Theories
Relevance
Theory
Gordon’s
Model
Walter’s
Model
Irrelevance
Theory
MM Model
Traditional
Approach

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RELEVANCE THEORY
• Gordon’s Dividend Capitalization Model
• Assumptions- equity firm, constant r, Ke ,retention ratio &
br (growth)
• Arguments- Investors avoid risk, prefer current dividend ,
can pay higher price for current dividend
• “Bird-in-hand” argument
P=
E(1 - b)
Ke – br

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Walter's Dividend Model
• Assumptions- Retained earnings only source, constant r, Ke, no change in the key
variables, indefintie life
• Value of share as sum of present value of all dividends and capital gains of future
• P = D+ [r / Ke] [E - D]
Ke
Conclusions
• r > ke, D/P ratio inversly related to market value, optimum D/P ratio= 0
• r < ke, D/P ratio directly related market value, optimum D/P ratio=100%.
• r = ke, market value constant irrespective of D/P ratio, no optimum D/P ratio
Limitation
• Applicable only to all-equity firms
• Assumption of constant r and Ke is not realistic

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IRRELEVANCE THEORY
• Miller and Modigliani Model (MM Model)
Assumptions
• Perfect markets, no transactions costs, no floatation costs, no taxes.
• Constant investment policy and r
Arguments
• Arbitrage, No net gain
• cost of capital would be independent of D/P ratio
• P0 = 1/(1 + ke) x (D1 + P1), nP0= (n + ∆ n) P1 - I + E
(1 + ke)
Limitations
• Perfect market, taxes, floatation& transaction costs
• Investors will not be different b/w dividend and retained earnings

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Ques. Ke =10% ; 25,000 shares selling at $100 each, D= $5/ share, earnings
$250,000, new investment requires $500,000.
• Value of the firm when dividends are paid:
– Price per share at the end of year 1:
P0 = 1/(1 + ke) x (D1 + P1) => $100 = 1/(1 + 0.10) x ($5 + P1)
P1 = $105
– Amount required to be raised from the issue of new shares:
∆ n P1 = I - (E - nD1)
=> $500,000 - ($250,000 - $125,000) => $375,000
– Number of additional shares to be issued:
∆n = $375,000 / 105 => 3571 shares
– Value of the firm:
=> (25,000 + 3571) (105) - $500,000 + $250,000 = $2,500,000
(1 + 0.10)

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• Value of the firm when dividends are not paid:
– Price per share at the end of year 1:
P0 = 1/(1 + ke) x (D1 + P1) => $100 = 1/(1 + 0.10) x ($0 + P1)
P1 = $110
– Amount required to be raised from the issue of new shares:
=> $500,000 - ($250,000 -0) = $250,000
– Number of additional shares to be issued:
=> $250,000/$110 = 2273 shares
– Value of the firm:
=> (25,000 + 2273) (110) - $500,000 + $250,000 = $2,500,000
(1 + 0.10)

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MRF Ltd.
M

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Announcement
Date
Dividend (%)
Face Value Rs10
Remarks
03-02-17 30.00 Rs.3per share
27-10-16 30.00 Rs.3per share
03-05-16 940.00 Rs.94per share
29-10-15 30.00 Rs.3per share
27-07-15 30.00 Rs.3per share
26-11-14 440.00 Rs.44per share
30-10-14 30.00 Rs.3per share
23-07-14 30.00 Rs.3per share
28-11-13 240.00 Rs.24per share
24-10-13 30.00 Rs.3per share
25-07-13 30.00 Rs.3per share
29-11-12 190.00 Rs.19per share
25-10-12 30.00 Rs.3per share
25-07-12 30.00 Rs.3per share

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CONCLUSION
Various theories & ideas about dividend, its distribution &
its effect on valuation of the firm
Unrealistic assumptions and situation
Dividend distribution do affect valuation of the firm

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LET’S TALK

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