Dividend Theory And Growth Model

Dividend Theory And Growth Model
Dividend is that part of earning which is distributed among the shareholders. The decisions about when and how much earnings should be paid as
dividends is part of the firm 's dividend policy. It is irrefutable that dividend policy is controversial issue as some people opine that dividends are
relevant for the valuation of company and others think that dividend does not effect the market price of shares and valuation of firm. Besides this, the
market where long term investment like share bonds are traded is capital market. In the following paragraphs, i will put my emphasis on both issues
the dividend relevance theory along with roles and importance of capital market.
Dividend relevance theory and Growth model
Overview of dividend policy
The term "dividends" indicates to the distribution of earnings to shareholders, primarily in the form of cash and after a company has distributed
dividends to preferred shareholders, the firm may keep the net earnings as retained earnings to fund investment projects or distribute residual net
earnings to common shareholders or pay a part as dividends and keep the remainder for investment purposes. The dividend payout ratio is the
proportion of earnings that is available to common shareholders that the firm pays out in the form of dividends. The up comings factors are important
to the decision of what proportion of a firm 's earnings should be retained and what proportion it should return to its shareholders.
в—Џ For the firm 's investment
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Chapter 14- corporations, dividends
CHAPTER 14
Corporations: Dividends, Retained Earnings, and Income Reporting
ASSIGNMENT CLASSIFICATION TABLE
Exercises
A
Problems
B
Problems
1, 2, 3
1, 2, 3, 4,
5, 6, 7
1A, 2A, 3A,
4A, 5A
1B, 2B, 3B,
4B, 5B
9, 10, 11,
12, 13, 14
4, 5

6, 8, 9
2A, 3A, 4A
2B, 3B, 4B
Prepare and analyze a comprehensive stockholders' equity section.
14, 15
6, 7
5, 6, 10, 11,
13, 15, 16
1A, 2A, 3A,
4A, 5A
1B, 2B, 3B,
4B, 5B
4.
Describe the form and content of corporation income statements.
15, 16
8
12, 13, 14
5.
Compute earnings per share.

17
9, 10
12, 14, 15,
16, 17
3A
3B
Study Objectives
Questions
1.
Prepare the entries for cash dividends and ... Show more content on Helpwriting.net ...
The declaration commits the corporation to a binding legal obligation that cannot be rescinded.
Record date is the date that marks the time when ownership of the outstanding shares is determined from the stockholder records maintained by the
corporation. The purpose of this date is to identify the persons or entities that will receive the dividend.
Payment date is the date on which the dividend checks are mailed to the stockholders.
(b) The accounting entries and their dates are:
Declaration date–Debit Retained Earnings and Credit Dividends Payable.
No entry is made on the record date.
Payment date–Debit Dividends Payable and Credit Cash.
4.
The allocation of the cash dividend is as follows:
Total dividend...............................................................................................
Allocated to preferred stock
Dividends in arrears–one year.......................................................
Current year dividend ........................................................................

Remainder allocated to common stock...................................................
$45,000
$10,000
10,000
20,000
$25,000
5.
A cash dividend decreases assets, retained earnings, and total stockholders' equity. A stock dividend decreases retained earnings, increases paid
–in
capital, and has no effect on total

Dividend Decision
Financial Management
Unit 15
Unit 15
Structure 15.1 Introduction 15.2 Traditional Approach 15.3 Dividend Relevance Model 15.3.1 15.3.2 Walter Model Gordon's Dividend Capitalization
Model
Dividend Decision
15.4 Dividend Irrelevance Theory: Miller and Modigliani Model 15.5 Stability of Dividends 15.6 Forms of Dividends 15.7 Stock Split 15.8 Summary
Terminal Questions Answers to SAQs and TQs 15.1 Introduction Dividends are that portion of a firm's net earnings paid to the shareholders.
Preference shareholders are entitled to a fixed rate of dividend irrespective of the firm's earnings. Equity holders' dividends fluctuate year after year. It
depends on what portion of earnings is to be ... Show more content on Helpwriting.net ...
Symbolically, P = [m (D+E/3)] Where P is the market price, M is the multiplier, D is dividend per share, E is Earnings per share. Drawbacks of the
Traditional Approach: As per this approach, there is a direct relationship between P/E ratios and dividend payВout ratio. High dividend payВout ratio
will increase the P/E ratio and low dividend payВout ratio will decrease the P/E ratio. This may not always be true. A company's share prices may
rise in spite of low dividends due to other factors. 15.3 Dividend Relevance Model Under this section we examine two theories – Walter Model and
Gordon Model. 15.3.1 Walter Model Prof. James E. Walter considers dividend payВ
outs are relevant and have a bearing on the share prices of the firm.
He further states, investment policies of a firm cannot be separated from its dividend policy and both are interВlinked. The choice of an appropriate
dividend policy affects the value of the firm. His model clearly establishes a relationship between the firm's rate of return r, its cost of capital k, to
give a dividend policy that maximizes shareholders' wealth. The firm

The Disadvantages And Disadvantages And Basics Of Dividend...
2.DIVIDEND POLICY
A dividend policy is a company's way of distributing profits to shareholders. It is a guideline that companies use to make decisions concerning how
much earnings will be paid to shareholders. Dividend policy only refers to ordinary shares. Before drafting a dividend policy, management needs to take
a number of basics considerations into account, such as factors that influence the dividends policy. There are four factors to be considered, legal,
contractual and internal constraints, growth considerations, owner requirements and market considerations. The aim of dividend policy is to satisfy
certain purposes such as wealth maximization and securing a source of funds.
Main approaches to dividend policies
2.1 RESIDUAL DIVIDEND ... Show more content on Helpwriting.net ...
71 of 2008, a company is no longer required to pay dividends out of the profits of the company. Dividends can be paid out of fair value adjustments
and asset revaluations but a firm should consider the impact that non–cash flow gains will have on the ability of the company to pay a cash dividend
(Financial Management, 7th edition, C. Correia). It may be argued that a company may elect to pay dividends from profits but the capital should
not be reduced in any way as this is seen as being illegal. It may be imposed that a legal constraint be put in place to restrict the amount of dividend
to be paid out relative to the company's earnings in their respective financial period. Liquidity position of the company is an important consideration in
dividend decisions. Liquidity may be under constraints due to economic conditions which is why it may be a variable of concern when firm's dividend
policy is being

The Change Of Corporate Dividend Policy
There have also been significant changes in corporate payout policy over this period.
According to the Constant payout ratio, a firm will pay a fixed dividend rate e.g. 40% of earnings. The dividend per share would therefore fluctuate
as the earnings per share changes. Dividends are directly dependent on the firm 's earnings ability and if no profits are made any dividends are paid.
This policy creates uncertainty to ordinary shareholders, especially who rely on dividend income and might demand a higher required rate of return
(Gitman, 1998).
Constant Amount Per Share or Fixed Dividend Per Share is where the dividend per share (DPS) is fixed in amount irrespective of the earnings
levels. This creates certainty and is therefore preferred by shareholders who have a high reliance on dividend income. It protects the firm from
periods of low earnings by fixing, DPS at a low level. This policy treats all shareholders by giving a fixed return. The DPS could be increased to a
higher level if earnings appear relatively permanent and sustainable.
Under the Constant Dividend Per Share Plus Extra/ Surplus policy, a constant DPS is paid every year. However extra dividends are paid in years of
supernormal earnings. It gives the firm flexibility to increase dividends when earnings are high and participate in supernormal earnings. The extra
dividends are given in such a way that it is not perceived as a commitment by the firm to continue the extra dividend in the future. It is applied by

Dividend Irrelevance Theory-Modigliani & Miller ( 1961 )
Dividend Irrelevance Theory– Modigliani & Miller (1961)
Since the emergence of the so–called irrelevance theorem by Miller and Modigliani (1961), many corporations are puzzled about why some firms pay
dividends while others do not. They were the first to study the effect of dividend policy on the market value of firms by assuming that there are no
market imperfections. Miller and Modigliani (1961) proposed that divided policy chosen by a firm has no significant relationship in as far as the market
valuation of the firm is concerned. They went further to explain that; the shareholders wealth remains unchanged irrespective of how the firm
distributes it income because the firms' value is rather determined by their investment policies and the earning power of its assets. They further stated
that the opportunity to earn abnormal returns in the market does not exist, that is, owners are entitled to the normal market returns adjusted for risk.
In accordance to this, MM provided assumptions to support their findings. These assumptions can be characterized by the existence of a perfect capital
market where;
there is no taxes or transactional costs
there is free accessibility to information about market
no buyer or seller has significant influence on the ruling share prices
investors are rational and risk averse, meaning they will always value securities with higher returns than securities with lower returns.
managers act on behalf of shareholders' and there is complete assurance about the investment policies and future cashflows of every corporation.
It is also important to note that these assumptions are untenable in the real world and if violated may lead to the relevance of dividend policy not
because dividends are preferred.
The Miller and Modigliani (1961) study was often used as a starting with Black and Scholes (1974); Merton and Rock (1995) and Bernstein (1996)
who supported their findings. However, in later research, several studies disapproved of their findings (Walter,1963; Litzenberger and Ramaswamy,
1982; Fama and French, 2002 and Kajola et al., 2015).
Bird in the Hand Theory– Lintner (1962) and Gordon (1963)
This hypothesis posited that an increase in dividend pay–out decisions has a

A Dividend Payment For Shareholders
A dividend is the part of a firm`s earnings that are paid to the shareholder, either in monetary terms or as shares. In the UK, dividends are paid by
UK–quoted companies semi–annually and are taxed depending on an individual`s income (Arnold, 2008 & GOV.UK, 2015). According to the
Financial Times (2015) however, adividend payment to shareholders is not an obligation, in fact a business`s board of directors are able to opt
whether they desire to make a dividend payment or not, depending mostly on the health of the business. If so, the dividend payment to shareholders
is made from a firm`s accumulated profits or reserves pots, with the anticipation that the firm can cover this withdrawal of monetary funds by
injecting further cash quickly and efficiently into the firm or shareholders may receive dividends in forms of shares, in this situation, a firm is
unlikely to lose much as shareholders would be likely to reinvest into the firm. Conversely, if a firm`s board of directors opt the opposing decision, not
to make a dividend payment, this is likely to be due to a firm supporting an insufficient cash–flow or the monetary fund's being identified as needed
urgently for more meaningful purposes, such as reducing debt (The Financial Times, 2015). Despite this, the main question in consideration is: whether
a rational investor considers dividends when determining the value of shares? In order to answer this question effectively, this essay shall commence
further through exploring

Dividend Tax
A dividend tax is an income tax paid on the earnings from a corporation that is distributed to its shareholders. Dividend payments are treated as
ordinary income, and they are taxed as if the taxpayer had earned income through active work. Presently, there is much controversy surrounding the tax.
The government taxes dividends twice: It first taxes corporate income, then taxes the same income again when shareholders receive dividends paid out
of corporate income. Which is a "double taxation"( http://pages.stern.nyu.edu/~byeung/dividend%20taxation.pdf). The double taxation raises the
questions of whether the tax should be eliminated, and which taxes should be cut. With both sides ..., the dividend tax ... because...,
The dividend tax was ... Show more content on Helpwriting.net ...
Currently, as of January 1st 2011, dividends will be taxed at the personal income rate rather than the qualified dividend rate. It should be noted that
dividends are distributed after the government has already been allocated its 35 percent corporate tax
Cutting the dividend tax also means more money to the consumer. These cuts will allow more money to be put into the banking system, and have a
direct effect on the money multiplier, which would put even more money into the economy. Instead of the economy receiving stimulus packages, a
dividend tax cut would give people more disposable income and encourage investment into U.S. companies.
Removal of dividend taxes would allow for investors and retirees to have more spending money. Out of all post–retirees, 50 percent report a dividend
tax (Messerli). This is significant because senior citizens, and those still saving for their retirement, would have more discretionary income available.
The additional discretionary income could also be used as a way to complement and provide relief for social security.
Elimination of the dividend tax could lead to more accurate accounting and administration of corporation. They would have fewer incentives to
misapply generally accepted accounting principles (Wharton). They would have fewer incentives to hide profits because the dividends would not be
taxed because profits are shown below the taxation

Factors of Bank Dividend Policy
The current issue and full text archive of this journal is available at www.emeraldinsight.com/0307–4358.htm
Explanatory factors of bank dividend policy: revisited
John Theis and Amitabh S. Dutta
D. Abbott Turner College of Business, Columbus State University, Columbus, Georgia, USA
Abstract
Purpose – The purpose of this paper is to examine the Dickens et al. model of bank holding company dividend policy. They identified five explanatory
factors in a sample of bank holding companies (BHCs). Banking companies typically pay larger dividends and more often than industrial firms.
Investors often look at the dividends as being important return variables. Design/methodology/approach – In this study, a sample of 99 firms with 2006
data ... Show more content on Helpwriting.net ...
They report the market value of the firm first increases as insider holdings increase from 0 to 5 per cent. As insider holdings increase from 5 to 25
per cent, the market value of the firm decreases. As insider holdings increase beyond 25 per cent, the market value of the firms again increases. They
argue their results are evidence of managerial entrenchment. While lower and higher levels of insider holdings support the notion that insider
holdings lead to lower agency costs, the middle level of ownership is a range over which managerial control seems to be linked with a significantly
lower market price of equity. The Morck et al. (1988) non–linearity results may be sample and/or time dependent. However, Wruck (1989) confirms the
range of ''entrenchment'' reported by Morck et al. She finds in a sample of firms announcing a private equity sale firm value increases significantly
for firms with low and high levels of insider holdings. Her findings confirm that, in a middle range of insider holdings, firm value decreases
significantly. In a study tracking the decline of banking in the USA, Gorton and Rosen (1995), find a non–linear relation between insider shareholdings
and risk–taking in lending activity. Using a sample of 458 BHCs, they present a model illustrating how managerial ownership of banks can lead to
entrenchment, resulting in management activities that reduce firm value. Gorton and Rosen's findings support the non–linear effect

Dividend Policy
Question 1
If we take a look at the company's compounded annual growth rate in EPS we can see that Georgia Atlantic's growth rate is really low compared
to the industry average. Furthermore we can see from the first table that Georgia Atlantic's P/E ratio is also lower in all the years as compared to
the industry and the M/B ratio is also relatively low compared to the industry. Due to the fact that Georgia Atlantic is operating in a relatively mature
market, there is a very low possibility for growth, that's why we consider Georgia Atlantic as a low growth company. For low growth companies it is
normal to have a low P/E ratio and a low B/M ratio because most of the company's value comes from their current operations and assets. Because ...
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Highly levered firms look forward to maintaining their internal cash flow to fulfill duties, instead of distributing available cash to shareholders and
protect their creditors. This is because firms with high leverage ratios have high transaction costs, and are in a weak position to pay higher dividends
to avoid the cost of external financing. While firm value can be increased by financial leverage, too much leverage leads to a shrinking company value
as bankruptcy costs start to outweigh tax shield benefits. The higher risk makes debt holders asking for higher returns to compensate them for the
increase in bankruptcy risk. Since dividend payments reduce the amount of capital available to secure the debt, many debt contracts include
restrictions on dividend payments. Bond indentures restrict dividend payments subject to minimum safety ratios. These two effects, the higher costs
of debt and the restrictions to pay dividends have, of course, a direct effect on the company's ability to pay dividends. The high leverage of Georgia
Atlantic, which is well above its industry average, reduces the possibilities for the firm in terms of its dividend policy. Holding Georgia Atlantic's
dividend payout history in mind, it might seem to be a bad time to start thinking about a policy change.
Question 6 1) No Cash Dividends, No Stock Dividends or Split
This strategy is not recommendable because firstly the

Dividend Policy : Review Of Theories
Dividend Policy – Review of Theories
Introduction
Dividend policy refers to the payout policy that a company follows in determining the size and pattern of distributions to shareholders over time.
Distribution of cash to shareholders by either payment of dividends and repurchase of shares has been a hotly debated topic amongst scholars. There
exists many answers to an optimal dividend policy that satisfies both shareholders and management. With this the company generally faces two
operational choices, the investment decision and the financing decision. Investment decisions concern the amount invested in the assets of the business
and composition whereas the finance decision involves how the company will finance this. This can be achieved ... Show more content on
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Gordon, J Lintner and J.T.S Porterfield. They believe the primary goal of a profit seeking company is to maximise shareholder wealth and in doing so
believe that dividend policy has an influential role in affecting shareholders wealth. They believe that firms firstly decide upon a dividend, then
secondly allocate remaining profits to internal investments and finally seek external financing to make up any remaining investment requirements.
Graham and Dodd reiterate this point as they argued that a dollar of dividends has, on average, four times the impact on stock prices as a dollar of
retained earnings.2
Alternatively, an opposing school of theory headed up by M.H. Miller and F. Modigliani (1958) believe that dividend policy is 'irrelevant' and argue
that the value of the firm is solely determined by the returns from its projects based on their investment policy. They believe that given a frictionless
market where no transactions costs and no barriers exist to the free flow of information dividend policy has no effect on either the price of a
company's stock nor its cost of capital. This is supported by Al–Malkawi who states that shareholders wealth is not affected by the dividend decision
and therefore they would be indifferent between dividends and capital gains.2 The reason for their indifference is that shareholder wealth is affected by
the income generated by the investment decisions a firm makes, not by how it distributes that income.
Given

The Pros And Cons Of Dividend
One of the company's financial policy is the payment of dividends to investors who have invested their funds in the form of company stock. Dividend
itself is a profit corporation that is set aside, revealed and given to shareholders based on the decision of the board of directors or the sum of the
proportion of company profits which are given to shareholders as remuneration for the contribution of shareholders who invest their money in
companies. The aim of the company to pay dividends is debatable. Until now there has been no explanation that can be widely accepted, especially to
answer such questions as why the corporation distributes some of its earnings in the form of dividends or why the corporation does not pay the
dividends, why investors ... Show more content on Helpwriting.net ...
For when the higher level of dividends paid that means the less of retained earnings, and as a result is to inhibit the growth rate (rate of growth) in
revenue. If the company wants to hold most of its revenues in the company, it means that the portion of available income for dividend payments is
smaller. The higher the rate of growth of the company, the greater the level of needs for funds tofinance the expansion. The greater the needs for funds
in the future, will increasingly allow companies to hold back profits and not pay it out as dividends. Therefore, the growth potential of the company is
an important factor that determines the dividend policy (Chang and Ree,

Miller And Modigliani's Dividend Irrelevance Theory?
2.4.1. Dividend irrelevance theory
Miller and Modigliani (1961) proposed the dividend irrelevance theory, suggesting that the wealth of the shareholders is not affected by the dividend
policy. It is argued that the value of the firm is subjected to the firm's earnings, which comes from company's investment policy. The literature proposed
that, the dividend does not affect the shareholders' value in the world without taxes and market imperfections or perfect capital market. Further they
argued that dividend and capital gain are two main ways that can contribute profits of the firm to the shareholders. When a firm chooses to distribute
its profits as dividends to its shareholders, then the share price will be reduced automatically by the amount of a dividend per share on the ex–dividend
date. So, they proposed that in a perfect market, dividend policy does not affect the shareholder's return. The main assumptions ... Show more content
on Helpwriting.net ...
This arises when management acts in their own interest rather than on behalf of the shareholders who own the firm. This is contrary to the assumptions
of Miller and Modigliani (1961), who assumed that managers are perfect agents for shareholders and no conflict of interest exists between them. But,
that assumption is somewhat questionable, as the owners of the firm are different from the management. Managers may conduct some activities, which
could be costly to shareholders, such as undertaking unprofitable investments that would yield excessive returns to them and unnecessary high
management compensation (Al–Malkawi, 2007). These costs are borne by shareholders; therefore, shareholders of firms with excess free cash flow
would require high dividend payments, because managers can misuse the excess free cash flow. Subsequently, high dividend paying firms perceive as
fairly governed entities and investors willing to pay a premium for

Example Of Dividend Policy Theory
Dividend policy theories
Dividends are the returns that ordinary shareholders obtain from the firms in which they made their investments in form of equity. They are paid
periodically and may vary from year to year depending on cash requirements of the firm as well as the profitability level of the firm. Dividend policy
shows the rationale through which firms use to allocate the profits of a firm in payment of dividends to the shareholders of the firm. Dividend may be
paid in cash or through bonus stock. It is the desire to get this periodic payment those investors chooses to invest their funds in common stock of these
firms.
Dividend policy theories seek to illustrate the rationale as well as the arguments that have been put forward in relations ... Show more content on
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They published a paper on; "dividend policy, growth and valuation of shares". Their major point of argument was on the importance of dividend
payout policy on a firm's valuation by investors. Their argument was made based on several assumptions thus the investor would be indifferent on
those firm that pay dividends and those that don't. In their 1961 paper they said that in determining the firm's future performance, then its capital
structure is irrelevant. Modgliani and miller hold the view that in the eyes of investor gains from capital investments dividends are seen as equivalent
to returns. Therefore it is from the firm's earning that the firm's value can be derived. This is dependent on the firm's policy which guides it n the
areas to invest in and the industry's Lucrative. Industry lucrative is public information and therefore investors will only require knowing the
investment policy in order to make investment decisions. They argue that an investor in a firm that is paying dividends and is not in need of money at
the time dividend is issued will reinvestment the money in stock. In a firm that does not pay dividend an investor in need of money will only sell part
of stock thus acquiring the amount of money that is in need

Avon's Dividend Policy
TABLE OF CONTENTSINTRODUCTION3PERFORMANCE OF AVON'S STOCK FROM 1978
–19883EVALUATION OF AVON' S FINANCIAL
CONDITION IN MID–19885PURPOSE OF THE EXCHANGE OFFER6EVALUATION OF THE
TRADE–OFF7REFERENCES10INTRODUCTIONA firm's decisions about dividends are often mixed up with other financing and investment
decisions. Some firms pay low dividends because management is optimistic about the firm's future and wishes to retain earnings for expansion. Other
firms might finance capital expenditures largely by borrowing. All the above are examples of dividend policies which can be defined more precisely as
the trade–off between retaining earnings on the one hand and paying out cash and issuing new shares on the other. In order to understand the dividend ...
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The decision of the company to finance its acquisitions with debt, starting from 1982, resulted to high interest expense payments every year (Exhibit
1). These high interest expense payments, combined with the decreasing net earnings made it very difficult for Avon to meet successfully its generous
dividend payment policy. So the company had to reduce its yearly dividend payments starting from 1982 and onwards. Under its financial condition in
1988 Avon has no other choice but to go for further reductions in dividends. That way the company will be able to meet its heavy debt obligations and
at the same time finance the "come back" to its core beauty products business.
PURPOSE OF THE EXCHANGE OFFERThe purpose of the exchange offer was to avoid having a dividend reduction drive down thestock price and
find the "golden mean" between its own interests and the interests of its 25 large Institutional shareholders. Those shareholders owned 46.5 % of total
Avon's outstanding shares (Exhibit 5) and expected high dividends from them. Some investors, as it is mentioned in the case, have stated that they held
Avon stock because it paid high dividends. Hence, a reduction of dividends would

Theories Of Dividend Policy
"There are two main schools of thought in respect Dividend Policy: the Relevance Theories, and the Irrelevance Theories. Explain briefly"
Dividend is that portion of net profits which is distributed among the shareholders. Every company would have their own dividend policy. Some
may have a kind of policy where they have a fixed amount of dividend for a number of years, some have a constant payout ratio, other can have a
constant dividend per share , some may give no divided at all etc. However some theorist believe that dividend policy is irrelevant other believe
relevant.
Let me first explain and give out examples of dividend relevance theories. Gordon's Model
It states that dividend policy is relevant to determining the value of ... Show more content on Helpwriting.net ...
d) No external financing is available and consequently retained earnings are used to finance all investments.
e) There are constant returns.
Walter's Model
This theory believes that a dividend decision of the company affects its valuation. Prof. J.E. Walter has studied the significance of the relationship
between internal rate of return (R) and cost of capital (K) in determining the optimum dividend policy which maximizes the wealth of shareholders.
According to the theory by Walter, the optimum dividend policy depends on the relationship between the firm's internal rate of return and the cost of
capital. IF R>K, the company should retain the entire earning, whereas it should distribute the earnings to the shareholders in case the where RK or
100% when Rs investments
K = Cost of equity
E = Earnings per share
It is important to note that this model is based on the following assumptions; Internal rate of return (R) and cost of capital (K) remains constant.
Retained earnings are the only source of financing investments. (i.e. no external finance involved) Constant Earnings Per share (EPS) and Dividend per
share (DPS) The firm has an infinite

Dividend Policy At Linear Technology
Xiaoling Tang
FIN 46059 Summer2015
William Billik
08/04/2015
Dividend Policy at Linear Technology Linear Technology dividend policy is considered a dividend stability policy because of the approach in its
allocation. Different from the residual and hybrid approaches, it involves paying dividends in quarters. The quarterly dividends are paid considering
fractions of the yearly earnings. This approach is also good because it reduces the uncertainty that investors may have as it provides income for them.
The revenue and the sales of the fiscal year of this company have increased over the years. Therefore, the company has had a steady increase in the
percentage of dividends provided over the years. The company realized a good opportunity of ... Show more content on Helpwriting.net ...
The provision of dividends is always associated with several problems in the process. Paying dividends regularly can easily lead to unrealistic
expectations among the shareholders. Any irregularity in a dividend provision policy might raise issues of discontent among the investors or parties
dependent on it, which results in the pressure on the company to maintain the dividends, such as the Linear Technology; they will have to maintain
their policy of increasing the dividend's percentage. Therefore, a company's bad or poor performance that might affect the dividends is easily realized
by the investors, which is disadvantageous for business.
Also, when the demands for dividends increase, cash flow for the company can be prevented. The chances of the company reinvesting profits in
their future growth are also minimized in the process. This can strain the future payment of dividends easily if the company gets to face challenges.
Like in the Linear company scenario, if they don't interfere with the provision of dividends, they might be affected in the future. The ideas on
providing dividends tend to vary when challenges come in; that is why the companies are always recommended to discuss and critically analyze
their position before making such major decisions. Dividends also prove to be a blunt instrument for a reward. This is because dividends are
rewarded to you regardless of whether you fully or partially depend on it. While it is non–discriminatory, the

Disadvantages Of Dividend
Dividend investing is investing in stocks for large cash dividends so that is a regular return on the investment in the form of cash. In fact receiving
dividends is very much like collecting interest on money deposited in a bank account. In stock markets, predicting the rise and fall of share prices is
very much difficult and in many ways dividend stocks offer a safe way of getting returns. In addition to that dividend stocks also have several other
advantages over non–dividend stocks.
Let us try to understand the concept of dividend. When a company earns the profit, it either invests that profit in back in the company for growth or
pays back the profits to its shareholders in the form of dividends, so that they get some return from the investments ... Show more content on
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Let us say a company has shares which have a market value of Rs.50 and face value Rs.10. It decides to pay a dividend of 50% on each of its shares.
As such the dividend paid on each of shares would be 50% of Rs.10 which is Rs.5. The dividend yield would be dependent on the market value of the
stock and not on the face value. In this case the dividend yield would be (Rs.5/Rs.50) X 100 = 10%.
The process of paying dividends has several stages. Initially, the board of directors of the company declares a dividend and sets a dividend record
and payment date. A record date is the date as of which the shareholders are entitled to receive the dividend. The payment date is the date when the
dividend is actually paid to the shareholders who had held the shares of the company on the record date.
Dividends give a good idea of the fundamentals of the company as they give a good indication of the cash flows into the company. A company's
financial health can be easily made to look healthy in terms of net income or earnings per share (EPS) by doing some manipulations on the
accounting part. However, with dividends such things are not possible as they are to be paid from the company's cash flows they cannot be
manipulated through accounting tricks. Companies that pay dividends tend to be more mature and stable as a company is only able to pay dividends
after attaining a sustainable level of

Five Types Of Dividend Theory
2.1Theory
2.1.1Dividend
2.1.1.1Definition of Dividend
According to investopedia, dividend is a distribution of amount of company's earnings that have been decided by board of directors, to their
shareholders. Dividends are cash payments that corporations make to their common stockholders (Gallagher and Andrew, 2013).Dividend per share can
be calculated as follow:
DPS=(Cash Dividend)/(Outstanding Shares)
2.1.1.2Types of Dividend
Based on Accounting Tools, There are five types of dividend. Cash Dividend
Board of director will pay dividend amount in cash to all investors holding company's stock in specific date. The date of record occurs when dividends
are assigned to the holders of stocks. On the date of payment, company issues dividend payments. Stock Dividend
A stock dividend is a dividend payment that being used if the company is in short of liquid cash. A big distribution of stock dividend is happening if it
is being distributed for more than 25% of outstanding shares, while less than 25% of outstanding shares are called a small distribution of stock dividend.
Property Dividend
Company may give non–monetary dividend to investors. ... Show more content on Helpwriting.net ...
According to this theory, dividend policy does not affect stock prices or the cost of capital of the company. Therefore, the dividend policy becomes
irrelevant. This theory developed by Miller and Modigliani in year 1961, which states that the value of the company is only determined by the
expected earnings and risk of the company. Value of company only depends on profit that comes from expected assets instead of dividing profit into
dividend and retained earnings. These theories assume that the dividend policy does not bring any impact to the value of the company. Thus, the
increase or decrease in dividends by the company will not affect the value of the

The Importance Of Dividend Policy
Dividend decision is considered as an integral part of investment decision making to maximize shareholders wealth as suggested by a number of
scholars such as Bainbridge (1993), Jensen (2001); Brigham and Ehrhardt (2002); Brealey and Meyer (2003). Considering its importance to the
organisation and shareholders, these scholars argued that shareholders return is maximized when company pays out dividend and investors are likely to
make some capital gains when the share prices appreciate. Some existing literatures have been carried out in both large and small firms in frontier and
advanced markets such as the UK, USA, Germany, Bangladesh, , Malawi, Malaysia and most recently, Zimbabwe and Jordanian using either an
evaluative or empirical ... Show more content on Helpwriting.net ...
Zero dividends are widely described as dividends and hence should not be excluded from the research, on that account the results from such studies
are regarded as not reliable since the sample size is small.
Taking into account the potential contribution these factors, is a strong motivation to examine the subject in detail because of its great impact on the
market value of firm for which investors are greatly concerned. Therefore, this study will attempt to highlight the dividend policy of each industry in
the UK and also try to employ the overall concept of dividend policy on share prices that are likely to affect shareholders return. For example (Salih,
ALAA.A, 2010; Md. Zahangir Alam and Mohammed Edndad Hossain, 2012, Fawaz Khalid Al–Shawawreh, 2014).
Added to that, previous studies from (Ooi, 2001, Brock et al, 1998; Md. Zahangir Alam and Mohammed Edndad Hossain, 2012), did not examine
the relationship between dividend policy and whole market and for each sector. Hence, to make a modest contribution to this literature, an empirical
evidence will be provided on the effect of dividend policy and share prices on firms listed on the LSE excluding financial firms because of the specific
nature of the firms during the financial crisis period in 2007–2009.
Furthermore, this study will also report results for a whole

Dividend Policy
BY: WAFAA OMAI
ADVANCED FINANCAIL MANAGEMENT
The purpose of this paper is to help management must decide on the form of the dividend distribution, generally as cash dividends or via a share
buyback. Various factors may be taken into consideration: where shareholders must pay tax on dividends, firms may elect to retain earnings or to
perform a stock buyback, in both cases increasing the value of shares outstanding. Alternatively, some companies will pay "dividends" from stock rather
than in cash.
The purpose of an optimal dividend policy should be to maximize shareholders' wealth. This depends on both current dividends and capital gains.
Capital gains can be achieved by retaining risome earnings for reinvestment and dividend growth ... Show more content on Helpwriting.net ...
So, investors view dividend increases as signals of management's view of the future. Therefore, a stock price increase at time of a dividend increase
could reflect higher expectations for future EPS, not a desire for dividends.
Researchers argue whether there exists an optimal dividend policy.
a) Dividend irrelevance theory–a firm's dividend policy does not affect the value of a firm.
b) Dividend relevance theory–the dividend policy is an important factor in the determination of a firm's value.
II–The Residual Dividend Policy.
It is a starting point to set an optimal policy that is why change prices is a long–run decision when it is declared, managers must sustain it at the
declared level otherwise any unexpected increase or decrease in dividends will affect the price of the stock. This doesn't mean that a change individual
may lead to change in price of the stock, but the change in dividend entails information about the future prosperity of the firm negatively or positively.
The firm's objective is to meet its investment needs and maintains its desired debt–equity ratio before paying dividends. Find the retained earnings
needed for the capital budget. Pay out any leftover earnings (the residual) as dividends. This policy minimizes flotation and equity signaling costs,
hence minimizes to find the WACC.
Using the Residual Model to Calculate Dividends Paid:

Literature Review On Dividend Policy
1.1 Literature Review: There are many theoretical and empirical results describing the decisions companies make in this area. At the same time,
however, there is no generally accepted model describing payout policy. Moreover, empirical findings are often contradictory or difficult to interpret in
light of the theory. In their seminal paper, Miller and Modigliani (1961) showed that under certain assumptionsdividends are irrelevant; all that matters
is the firm's investment opportunities. Miller and Modigliani considered the case of perfect capital markets (no transaction costs or tax differentials, no
pricing power for any of the participants, no information asymmetries or costs), rational behaviour (more wealth being preferred to less, indifference
between cash payments and share value increases) and perfect certainty (future investments and profits are given). In real life, however, people seem to
care about dividends. Lintner.s (1956) classical study on dividend policy suggests that dividends represent the primary and active decision variable in
most situations. Lintner suggests a model of partial adjustment to a given payout rate. ... Show more content on Helpwriting.net ...
They suggest that firms with more risky returns on assets pay lower dividends, all other things being equal.
Kumar (1988) builds a model that explains dividend smoothing – one of the most salient features of dividend policy. Dividends once again signal a
firm's quality (productivity), but, since they are over invested in the firm, managers will try to under invest by underreporting a firms productivity.
While there is no fully revealing equilibrium, Kumar shows that firms will tend to cluster around optimal dividend levels. Agency theory suggests that
dividends can be used as a means to control a firm's management. Distributing dividends reduces the free cash

Pay Out Dividends Essay
Paying out dividends belongs to the easiest way to communicate financial well–being and shareholder value, since they are sending out a powerful
message about future prospects and performances. The willingness, and also the ability of companies to pay out steady dividends and maybe even to
increase them, provides the shareholder with valuable information about the company 's fundamentals.
Wherever you are looking for information regarding dividends, you will find statements about their affection on stockholders. But where is the point
for the companies? What drives companies to pay out dividends, and why do some companies do so and some do not?
There is the opinion of some financial analysts that a dividend policy is irrelevant ... Show more content on Helpwriting.net ...
On top of this set dividend, there is always the possibility for these companies to offer another extra dividend, paid only when income exceeds
generally obtained levels.
In the following, we had a closer look at the German company "Porsche" and we tried to find some information about their dividend policy. As the
following tables show, there was a steady increase of the paid dividend over the last years which reached a level of 3.34 Euros for the common stocks
and of even 3.40 Euros for the preferred stocks in 2003:
In order to find out whether Porsche is using the residual, stability or the hybrid method, we firstly started to examine whether the obviously most
probable method, the stability growth policy applied. Therefore, we examined the yearly dividends but could not find any dependence. Now, we
calculated the amount of shares necessary to distribute the whole net income under Porsche 's shareholders which led us to the following tables :
For the reason that Porsche did not increase the number of shares in the last years and the dividend payout did not increase constantly, we concluded
that Porsche is not using the stability dividend policy. Nevertheless, since Porsche 's dividend strategy is a rising one, we assumed that they are using a
mixture of the residual and the stability policy, namely the hybrid strategy. Admittedly, we have to say that their dividends did not increase depending
on the level of net income as the next

Constructive Dividend Vs. Constructive Dividends
Generally, a constructive dividend is unique from an ordinary dividend in many different ways. A constructive dividend is a form of payment to the
shareholders from a corporation which can cause in financial benefits to its shareholder. Section 316(a) defines a dividend as any distribution of
property (money, securities, and any other property except stock) that a corporation makes to its shareholders out of its current and accumulated
earnings and profits after February 28, 1913. In other hand, a constructive dividend is a payment made by a corporation, which benefits to a shareholder
even if the payment is made indirectly to the shareholder, and even there is no formal dividend declaration. Similarly, for tax purposes, the constructive
dividend and normal dividend are treated the same as actual distributions, which are taxable to the shareholders to the extent of the current and
accumulated earnings and profits of the corporation.
Constructive dividend situations exist in various levels of corporations, especially in closely held corporations. The purposes of the constructive
dividends are that the corporations intend to achieve some tax objectives to avoid actual and formal dividends. The following areas that the IRS usually
focuses on to challenge the issues of constructive dividends to the shareholders and corporations: unreasonable compensation, shareholders use of
corporation–owned property, bargain sale or bargain rental of corporate property to shareholders,

The Tax Of A Dividend Tax
A dividend tax is an income tax paid on the earnings from a corporation that is distributed to its shareholders. Dividend payments are treated as
ordinary income, and they are taxed as if the taxpayer had earned income through active work. Presently, there is much controversy surrounding
dividend tax. The government taxes dividends twice: It first taxes corporate income, then taxes the same income again when shareholders receive
dividends paid out of corporate income. The double taxation raises the questions of whether the tax should be eliminated, and which taxes should be cut.
The dividend tax was introduced in 1936 by President Roosevelt in the New Deal (Levey). The Economic Growth and Tax Relief Reconciliation
Act of 2001 introduced lower dividend tax rates (NATP 2001). On May 23, 2003, President Bush signed the Jobs and Growth Tax Relief
Reconciliation Act of 2003, which gained momentum to passing the tax changes, and was supposed to expire in 2008 (NATP 2003). Then on May
17, 2006 the reduced rates were extended an additional two years by the Tax Increase Prevention and Reconciliation Act, into 2010 (NATP 2005).
There are two ways used for the purpose of calculating dividend tax, and they are known as qualified dividends and non–qualified dividends. Qualified
dividends are stocks held more than 60 days during the 121–day period that begins 60 days before the ex–dividend date. These dividends are taxed at 5
percent if the investor is below the 25 percent personal

Why Firms Pay Dividends Essay
Why Do Firms Pay Dividends? International Evidence on the Determinants of Dividend Policy*
DAVID J. DENIS** Krannert School of Management Purdue University West Lafayette, IN 47907 djdenis@purdue.edu
IGOR OSOBOV Georgia State University Department of Finance Atlanta, GA 30303 iosobov@gsu.edu
May, 2007
We thank Yakov Amihud, Harry DeAngelo, Linda DeAngelo, Diane Denis, Jim Hsieh, Omesh Kini, Erik Lie, John McConnell, Lalitha Naveen, Raghu
Rau, Steve Smith, Jeff Wurgler, an anonymous referee, and seminar participants at Colorado, Georgia State, and Purdue for helpful comments.
**
*
Corresponding author.
Electronic copy available at: http://ssrn.com/abstract=887643
Why do Firms Pay Dividends? International Evidence ... Show more content on Helpwriting.net ...
more firms exhibit characteristics similar to those of non–dividend–paying firms), Fama and French nonetheless report that once they control for these
characteristics, they still find a significant decline in the residual propensity to pay dividends. This evidence poses a further challenge to dividend
theories in so far as candidate theories should be able to explain time series changes in the propensity to pay dividends. We extend this literature by
examining cross–sectional and time–series evidence on the propensity to pay dividends in several developed financial markets – the United States
(U.S.), Canada, the United Kingdom (U.K.), Germany, France, and Japan – over the period 1989 to 2002. Specifically, we examine (i) whether the
characteristics of dividend payers and nonpayers are common across countries; (ii) whether these characteristics have changed over time; and (iii)
whether firms in other countries exhibit a declining propensity to pay dividends in recent years. In addition, the use of international data allows us to
provide further tests of the life cycle, signaling, clientele, and catering explanations by analyzing the concentration of dividend payments as well as the

association between Baker and Wurgler's (2004a,b) dividend premium and the propensity to pay dividends in other countries. Our evidence reveals
common determinants of dividends across countries. Like Fama and French (2001), we find

Stock Dividend
Stock dividend * Definition: * A corporate distribution to shareholders declared out of profits, at the discretion of the directors of the corporation,
which is paid in the form of shares of stock, as opposed to money, and increases the number of shares. * A dividend paid as additional shares of stock
rather than as cash. If dividends paid are in the form of cash, those dividends are taxable. When a company issues a stock dividend, rather than cash,
there usually are not tax consequences until the shares are sold. * Explanation:
When a corporation declares a stock dividend, it adds undivided profits, which cannot be used to pay dividends, to the capital invested in the
corporation, to reflect the additional shares it is ... Show more content on Helpwriting.net ...
So, if the expectations do not fulfill then the confidence of the investors may go down. Therefore, the share prices may further go down. * There is
basically no relation between the performance of a company and stock split. So the companies will waste time if they wait for a stock split.
* Effects:
A share split will result in all shareholders holding more shares in the company. However, the STAKE in the nominal value of the company per share
will remain the same (the share 's portion in the share capital). The nominal value per share will decrease. Each new share will carry the same rights as
the pre–reverse–split shares (including voting rights and dividend entitlements).
* Preconditions:
A stock split requires Shareholder approval at an Annual General Meeting pursuant to the Board 's proposal. The proposal includes a resolution on a
change in the articles of association with regards to the highest and lowest number of shares that may be issued.
* Dates for stock splits:
When dealing with transformations on stock splits, an investor needs to consider 2 dates:
Exdate and Record date:
* The EXDATE is the date at which the shares are trading at post–split prices. * The RECORD DATE is used by the custodian to establish whom to

debit and credit the shares from and to.
Depending on the market (country) the dates will be set in different ways. There are two main principles: * Exdate driven markets: In

Minicase Dividend Policy
Dividend Policy DEANNA PEREZ FASHIONS, INC. Directed As a young adult in her mid–twenties, Deanna Perez emigrated from Spain with her
family to New York City in the early 1950s. Deanna was artistically inclined and loved women's fashions. Even as a young girl, Deanna had spent
hours drawing, designing, and sewing outfits for her dolls; consequently, it was no surprise to her family when she took a job in the fashion industry.
It was Deanna's dream to someday be successful, wealthy, and own her own company. Deanna worked for a few years as an apprentice for various
well–known fashion designers, but she grew frustrated because her creativity was being suppressed more and more frequently. She decided that it was
time for her to... Show more content on Helpwriting.net ...
Also, DPF's liquidity position had deteriorated considerably. See Table 1. The firm has continued to face problems in its target market during the
frugal nineties, as have other apparel firms. The money spent on apparel has dwindled for a number of reasons. First, clothing has never been involved
in as much competition for the consumer dollar as it now faces. Purchases of constantly updated personal computers and communications equipment is
a relatively new element now taking a big chunk of disposable income. Second, the overriding trend toward casual dressing, the wearing of untailored,
easily cared for, and lower–priced clothing cuts down on the number of garments needed by the average household, as well as the dollar outlay per
garment. Third, the women's wear industry hasn't brought out a strong, overriding fashion statement in several years. In the past, the absolute need to
change to long skirts, for example, made most wardrobes completely obsolete after one season. Nowadays, the varying dress lengths allow a woman
to carry over most of the items in her closet to another season or more. Finally, the lack of significant gains in the average person's real income and
the constant publicity about job layoffs seem to have convinced many people to make their old clothing do. For these reasons, consumers in the '90s
have become quite price conscious, and lower quality clothing brands have

The Dividend Policy Puzzle
INTRODUCTION
Dividend payout ratio has been an issue of interest in daily financial literature. An example, many academicians and researchers have devoted their
time to develop several theoretical models to provide some insights into the dividend policy puzzle. Dividend theories are developed with some of
empirical support.
Dividends is a payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a
corporation earns a profit or surplus that money can be locate by two uses. Which it can either be re–invested in the business that called retained
earnings or it can be distributed to all shareholders. There are two ways to distribute cash to shareholders, such as share repurchases or give dividends.
Many corporations retain a portion of their earnings and pay the remainder as a dividend.
Dividend also has been analyzed for many decades, but it is not universally accepted explanation for companies' observed dividend behavior has been
established. According to Brealey and Myers (2005) described that dividend policy as one of the top ten most difficult unsolved problems in financial
economics. This description is consistent with Black (1976) who stated that:
"The harder we look at the dividend picture, the more it seems like a puzzle with pieces that don't fit together".
The study would be exciting to conduct a research regarding dividend payout ratios and even though some studies should be conducted as

Changes to Dividend Pay-out Ratio
When deciding on changes to dividend pay–out ratio, there are several factors which must be considered. This piece looks at the different underlying
theories which affect management's decision, before looking at what policy would be considered best for FPL and how to implement a change.
Perfect capital markets assume no taxes or market frictions, no agency costs and symmetric information. Dividend irrelevance arises because, for a
given investment plan and holding capital structure constant, funds used to pay dividends could only be replaced from one source: new share issues.
Dividend policy is therefore a trade–off between retaining earnings to finance future investments, or paying dividends and raising new equity to replace
pay–outs. However, in practice, dividend policy is not irrelevant. There are conditions of perfect markets that do not occur in actual markets, so we
must look at the following frictions when analysing FPL's dividends; taxation costs, agency costs and the clientele effect.
Dividends paid to individual investors are double taxed, once when the company pays corporation tax, and once in the hands of shareholders as income
tax. Capital gains (the increase in share price from when it is bought to when it is sold), are taxed at lower rates. From this, it is possible that
shareholder wealth would be maximised by paying no dividend, avoiding double taxation and pursuing stock growth given the lower capital gains tax.
This would require all retained earnings

The Payment Of Dividends And The Issue Of Shares
The payment of dividends and the issue of shares in return for capital investment are important aspects of company law. As such, there are certain
requirements that must be met in order for both shares and dividends to be lawfully issued. These requirements are located within the company's
articles and statute. The Company's articles "operate as contract between the company and its members" and outline the requirements that the directors
must follow in order for a transaction to be lawful.
ABC wish to issue new shares and a pay a dividend using the newly appointed share capital. There is no detail in relation to when ABC were
incorporated other than that it was under the Companies Act 2006 ("CA"). There are many versions of the standard ... Show more content on
Helpwriting.net ...
This is supported by statute which allows directors to issue share capital provided this is sanctioned by the articles. It is possible for the articles of
the company to permit different classes of share to be offered and thus enable preferential shares to be offered to Mrs Donald and the Model Articles
clearly does this within article 22. There are however, certain caveats in respect of the rights of the existing members which can restrict this provision.
The CA gives existing shareholders a right of pre–emption as a means of preventing their voting power from being diluted by the allotment of new
shares if the issue is of ordinary shares.
Section 561 determines that existing members must be offered "on the same or more favourable terms a proportion" of the proposed issue equal to
the proportion of shares held by the member. The offer must be made to the existing member in writing and must allow at least 14 days for the offer
to be accepted or declined. Contravention of this requirement could render the officer(s) involved and the company jointly and severally liable to the
member for any loss suffered or expense incurred by their failure to meet this requirement. However section 563 CA does not result in an invalidation
of the allotment in the event that it was done infringing section 561 or 662 CA.
Whilst it is possible

Corporation : Constructive Dividend System
MEMORANDUM
May 19, 2015
From: Shimul Paul
To: Prof. Steven J. Mandelkorn
Subject: Corporation: Constructive Dividend
The corporation is ruled by the internal revenue Code where Subchapter C is the C Corporation and Subchapter S is the S corporation. Income on C
Corporation is subject to double taxation; thus, the dividend distribution is not deductible by corporation. All corporations receive dividend where they
treat them as ordinary income. Ordinary income can be allowed as dividend payment deduction. The tax treatment of dividend differs in corporation
depending on the types of entity. According to the Internal Revenue Code В§ 316 "the term dividend means any distribution of property made by a
corporation to its shareholders–out of its earnings and profits accumulated after February 28, 1913." However, there are many different types of
dividend such as Qualified Dividends, Property Dividends and Constructive Dividends.
The constructive dividend treated same as actual distributions which are taxable to the shareholders and on the accumulated earnings and profits of the
corporation. As a payment, constructive dividend benefits the corporation shareholders irrespective of any dividend declaration. Constructive dividend
comes into various levels of corporations such as closely held corporations which can be direct or indirect payment. The constructive dividend is
substitute for actual distributions which intended to complete any tax satiations that are not accessible

Advantages And Disadvantages Of Stock Dividends
Stock Dividends
Similar to the cash dividends, stock dividend pays out stock. With this, the company's shares outstanding will increase and the stock price will
decrease. In small stock, the dividends will less than 20 to 25%. In large stock dividends will more than 20 to 25%.
Advantages of Stock Dividends
1.If the company didn't make profit, you might not receive cash dividends, but the situation is different in stock dividends. For example if the price of
stock decrease 5%, but the company pays 5% dividend, you will not loss.
2.Stock dividends provide you a real profit you will have a real return on your investment but not the value you see in the financial report.
3.There have choices of taking the dividend payment or reinvesting to the investors when they buy a dividend stock. If they reinvest the dividends into
the stock, they add more value in investment for compound interest when they buy more shares. ... Show more content on Helpwriting.net ...
Shareholders fail to realize the stock dividend doesn't affect their wealth and there's no value for them.
2.If the company declares periodic small stock dividends, it can be

Gordon's Theory Of Dividend Policy
Introduction
According to the Institute of Chartered Accountant of India, dividend is defined as "a distribution to shareholders out of profits or reserves available
for this purpose". The financial manager must take careful decisions on how the profit should be distributed among shareholders. It is very important
and crucial part of the business concern, because these decisions are directly related with the value of the business concern and shareholder's wealth.
Like financing decision and investment decision, dividend decision is also a major part of the financial manager. When the business concerns decide
dividend policy, they have to consider certain factors such as retained earnings and the nature of shareholder of the business concern. ... Show more
content on Helpwriting.net ...
This is important for obtaining the meaningful value of the company's share. o Valuation Formula and its Denotations o Gordon's formula to calculate
the market price per share (P) is P = {EPS * (1–b)} / (k–g) o Where, o P = market price per share o EPS = earnings per share o b= retention ratio of the
firm o (1–b) = payout ratio of the firm o k = cost of capital of the firm o g = growth rate of the firm = b*r o Explanation o The above model indicates
that the market value of the company's share is the sum total of the present values of infinite future dividends to be declared. The Gordon's model can
also be used to calculate the cost of equity, if the market value is known and the future dividends can be forecasted. o The EPS of the company is Rs.
15. The market rate of discount applicable to the company is 12%. The dividends are expected to grow at 10% annually. The company retains 70% of
its earnings. Calculate the market value of the share using the Gordon's model. o Here, E = 15 o b = 70% o k = 12% o g = 10% o Market price of the
share = P = {15 * (1–.70)} / (.12–.10) = 15*.30 / .02 = 225
o

What Is Dividend Policy?
What is Dividend Policy Dividend policy is the set of guidelines a company uses to decide how much of its earnings it will pay out to shareholders.
The portion of the earnings that the company gives out are called dividends. A company is expected to pay dividends based on its cash excess and
it long term earning power. A company's management is expected to pay out their surplus earnings in the form of cash dividends or by a share
buyback programme. Although the share buyback programmes and dividends decrease a firm 's retained earnings and pay investors cash, they are
quite different. With a share buyback programme, the company pays cash to the investor by buying back some of its outstanding shares. Companies
can declare both regular and "extra" dividends. Regular dividends usually remain unchanged and pay dividends at regular intervals in the future, but
"extraordinary" or "special" dividends are unlikely to be repeated. According to Miller and Modigliani (1961), the value the shares or returns to an
investor remains unchanged because the dividend they earn is lost in capital appreciation.
Types of dividends:
Cash Dividends: These dividends are paid in cash, usually quarterly. When cash dividends are paid to the investors, the price of the dividend paying
stock decreases by the same price of that of the dividend it pays.
Stock dividend: Shareholders receive new stock form the firm as a form of a dividend. The number of shares the shareholder own in the firm is

Linear Dividend
9–204–066
REV: FEBRUARY 11, 2004
MALCOLM P. BAKER
ALISON BERKLEY WAGONFELD
Dividend Policy at Linear Technology
It was April 2003 and Paul Coghlan was pulling together his notes for Linear Technology's board meeting the following day. As chief financial officer
of the Silicon Valley semiconductor company,
Coghlan was responsible for making a recommendation about whether or not Linear should increase its dividend this quarter. Coghlan and Linear's
CEO Robert Swanson were pleased with the company's third–quarter financials for fiscal year 2003, but sales and net income still remained
substantially below Linear's record levels set in 2001. In addition, the technology industry was still emerging from a recessionary environment ... Show
more content on Helpwriting.net ...
In addition, analog fabs could be used for 10–plus years, while digital fabs often become obsolete within three to five years.1
Research and development expenses were also modest, peaking at $102 million in fiscal year (FY)
2001. Within the analog segment of the industry, Linear competed with Maxim, Analog Devices, and
1 Goldman Sachs, "Technology: Semiconductors," February 21, 2003, p. 91.
________________________________________________________________________________________________________________
Professor Malcolm P. Baker and Alison Berkley Wagonfeld, Executive Director of the HBS California Research Center, prepared this case. HBS
cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of
effective or ineffective management.
Copyright © 2003 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1–800–545–7685, write
Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored
in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means–electronic, mechanical, photocopying, recording, or
otherwise–without the permission of Harvard

Dividend Policy and Share Prices
Introduction
In this paper the impact of dividend policy of the companies on the firm's share prices is analysed and different views in the context of the semi–strong
form of the efficient market hypothesis are contrasted. The overview of the traditional and most recent empirical investigations of the stock market
reaction to the dividend announcements is provided and different findings are discussed and compared.
Three companies have been selected from the FTSE All share price index. These companies are Tesco, Burberry and Vodafone. These firms belong to
different sectors of the economy. Tesco is the largest retailer in the UK, Burberry is a fashion firm and Vodafone is the telecommunication services
company. The dividends and... Show more content on Helpwriting.net ...
Dividend Announcements and Share Prices
Dividend announcements and their impact on share prices can be explained by the semi strong form of the efficient market hypothesis (EMH).
Efficient market hypothesis implies that the only thing that may impact the stock prices is new information, since all other possibly influencing
parameters are already included in the firm's stock price (Palan, 2004).The efficient market hypothesis may be divided into three forms: the weak form,
the semi–strong form, and the strong form. The weak form implies that share prices bear or reflect the past prices and trade volume information, the
semi–strong form adds publicly available information to the weak form, and the strong form adds even insider information to the efficiency approach
(Harder, 2008).
Empirical evidences show that successive changes in stock prices are independent and this independence is in line with the efficient market hypothesis,
as markets promptly react to the new information (Fama et al., 1969). In this context it may be assumed that dividend announcements convey particular
positive information about the company and provide signals about future performance of the firm. The decision about paying dividends is made by the
firm's managers and often supported by shareholders' voting. Since dividend announcements bear useful information, from the efficient market
hypothesis view point this

The Advantages Of The Discounted Dividend Model
Discounted Dividend Model
First advantage of discounted dividend model is conservatism. The dividend discount model only values on what the company pays out to investors.
Earnings of a company, the cash the company holds, or anything other than the dividend is not considered by this model. Second advantage is
simplicity. The dividend discount model is one of the easiest ways to value a security. It requires only three inputs, which almost any investor can
reasonably determine or forecast. Because of its conservatism, investors who value companies with a dividend discount model have more room for
error in the variables they forecast than do investors who use alternative, more finicky projections.
Limited use of discounted dividend model is this ... Show more content on Helpwriting.net ...
When accounting standards vary widely across firms, P/BV ratio can not be comparable across firms. It can be misleading to investors when there are
significant differences in the asset intensity of production methods among the firms.Book value may not carry much meaning for service firms which
do not have significant fixed assets. The book value of equity can become negative if a firm has a sustained string of negative earnings reports, which
lead to a negative P/BV ratio. P/BV can be misleading to investirs when there are significant differences in the asset intensity of production methods
among the firms.
In addition, book value for tangible assets are stated at historical cost which is not a reliable indicator of economic value. P/BV ratio fails to reflect
intangible assets such as intellectual assets ,brand value of the company or human capital of service companies. As a result, the balance sheets of such
companies fail to reflect the intellectual assets of the companies. In turn, this leads to low book values and artificially high P/BV ratio and hence make
the measurement not so accurately as the book value does not reflect the current market value of the tangible

Dividend and Topic
Chapter 14 Questions:
Topic: DIVIDENDS 1.Payments made out of a firm 's earnings to its owners in the form of cash or stock are called: A)Dividends. B)Distributions.
C)Share repurchases. D)Payments–in–kind. E)Stock splits.
Answer: A
Topic: REGULAR CASH DIVIDENDS 2.A cash payment made by a firm to its owners in the normal course of business is called a: A)Share
repurchase. B)Liquidating dividend. C)Regular cash dividend. D)Special dividend. E)Extra cash dividend.
Answer: C
Topic: SPECIAL DIVIDENDS 3.A cash payment made by a firm to its owners as a result of a one–time event is called a: A)Share repurchase.
B)Liquidating dividend. C)Regular cash dividend. ... Show more content on Helpwriting.net ...
A)stock B)normal C)special D)extra E)liquidating
Answer: A
Topic: STOCK SPLITS 15.An increase in the firm 's number of shares outstanding without any change in owners ' equity is called a
_______________. A)special dividend B)stock split C)share repurchase D)tender offer E)liquidating dividend
Answer: B
Topic: TRADING RANGE 18.The difference between the highest and lowest prices at which a stock has traded is called its: A)Average price.
B)Bid–ask spread. C)Trading range. D)Opening price. E)Closing price.
Answer: C
Topic: REVERSE SPLITS 16.In a reverse stock split, __________________________. A)the number of shares outstanding increases, and owners '
equity decreases B)the firm buys back existing shares of stock on the open market C)the firm sells new shares of stock on the open market D)the
number of shares outstanding decreases, but owners ' equity is unchanged E)shareholders make a cash payment to the firm, just the opposite of a cash
dividend

Answer: D
Topic: REGULAR CASH DIVIDEND 17.All else the same, which of the following is a possible consequence of the firm making a regular cash
dividend payment? A)The cash account decreases. B)The additional paid–in capital account decreases. C)The common stock (par value) account
decreases. D)The stock price declines by the amount of the

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