1. The document discusses various aspects of dividend policy including definitions, significance, factors affecting decisions, and types of dividend payments. 2. It provides details on cash dividends, stock dividends, and stock splits - the main types of dividend payments. Cash dividends directly pay out profits to shareholders, stock dividends distribute additional shares, and stock splits proportionally increase the number of shares at a reduced price per share. 3. The relevance and impact of dividend policy on both companies and shareholders is analyzed, noting theories on both sides of the debate around whether dividends affect firm value. Factors considered in dividend decisions and the process for distributing payments are also outlined.

1. Berat BAŞAT
Marmara University
Institute of Social Sciences
Department of Business Administration in English
Sub-Departent of Accounting and Finance
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2. Definitions
Significance of DP
Factors that affect the Dividend Decision
Divident Payment Process
The Relevance of DP
Types of DP
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3. Dividend is a part of profits of a company which is
distributed by the company among its shareholders.
It is the reward of the shareholders for investments made
by them in the shares of the company
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4. It refers to the policy that the management formulates in
regard to earnings for distribution as dividends among
shareholders.
It determines the division of earnings between payments to
shareholders and retained earnings
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5. The firm has to balance between the growth of the
company and the distribution to the shareholders.
It has a critical influence on the value of the firm.
It has to also to strike a balance between the long term
financing decision
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6. Contd.....
The market price gets affected if dividends paid are less.
Retained earnings helps the firm to concentrate on the
growth, expansion and modernisation of the firm.
It affects the financial structure, flow of funds, corporate
liquidity, stock prices, growth of the company and
investor’s satisfaction.
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7.  Stability of earnings  Growth needs of the company
 Financing policy of the firm  Profit rates
 Liquidity of funds  Corporate taxation policy
 Dividend policy of  Tax position of shareholders
competitive firms  Attitude of the investor group
 Past dividend rates
 Debt obligation

8.  Declaration Date – is the day the Board of Directors
announces its intention to pay a dividend. On this day, a
liability is created and the company records that liability
on its books; it now owes the money to the stockholders.
On the declaration date, the Board will also announce a
date of record and a payment date
 Ex-dividend Date
 Occurs two business days before date of record
 If you buy stock on or after this date, you will not
receive the dividend
 Stock price generally drops by about the amount of the
dividend
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9. Date of Record – The record date typically follows the
ex-dividend date by two business days. The record date
is the date on which an investor must be a stockholder
of record (that is, officially listed as a stockholder)
in order to receive the dividend.
Date of Payment – The dividend checks are mailed to
shareholders of record
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11.  Merton Miller and Franco Modigliani (MM) developed a
theory that shows that in perfect financial markets
(certainty, no taxes, no transactions costs or other market
imperfections), the value of a firm is unaffected by the
distribution of dividends.
 They argue that value is driven only by the future
earnings and risk of its investments.
 Retaining earnings or paying them in dividends does not
affect this value.

12.  Some studies suggested that large dividend changes
affect stock price behavior.
 MM argued, however, that these effects are the result of
the information conveyed by these dividend changes, not
to the dividend itself.
 Furthermore, MM argue for the existence of a “clientele
effect.”

13. Clientele effect represents the impact on the stock price
that investors would cause in reaction to a change in policy
of a company. Consequently, dividend policy won't effect
the value of the stock as long as clientele exist, dividend
policy is irrelevant
Investors preferring dividends will purchase high dividend
stocks, while those preferring capital gains will purchase
low dividend paying stocks.
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14.  In summary, MM and other dividend irrelevance
proponents argue that an investor’s required return, and
therefore the value of the firm, is unaffected by dividend
policy because:
1. The firm’s value is determined only by the earning power and
risk of its asset investments.
2. If dividends do affect value, they do so because of the
information content, which signals management’s future
expectations.
3. A clientele effect exists that causes shareholders to receive
the level of dividends they expect.

15.  Contrary to dividend irrelevance proponents, Gordon
and Lintner suggested stockholders prefer current
dividends that a positive relationship exists between
dividends and market value.
 Fundamental to this theory is the “bird-in-the-hand”
argument which suggests that investors are generally
risk-averse and attach less risk to current as opposed to
future dividends or capital gains.
 Because current dividends are less risky, investors will
lower their required return—thus boosting stock prices.

16. 1.Cash dividends
This is the most common method of sharing corporate
profits with the shareholders of the company and usually
paid quarterly. For each share owned, a declared amount of
money is distributed. Thus, if a person owns 100 shares and
the cash dividend is USD $ 1 per share, the holder of the
stock will be paid USD $100
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17. Earnings For Investors
A stock that pays stable annual dividends is more attractive
to investors, because they can trust that even if the stock
price dips a bit, they will still make money from the
dividends.
Stability
If a company has a track record of paying increasing
dividends over time, investors will be more likely to view the
company as a good investment because of its stability.
Publicity
Companies that pay dividends announce them, which
generates additional publicity for the company.
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18. Decreased Retained Earnings
When the company pays dividends, that means it has less
money to invest in company growth.
Taxes
A disadvantage of paying dividends is that the investor must
pay tax on dividends at the rate of 15 percent. If the
payments were retained, the stock price could grow tax free
until it was sold, and then only a five-percent capital gains
tax would apply
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19. 2.Stock dividends
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.
Stock dividend is a distribution of new shares to existing
stockholders in proportion to the percentage of shares
that they own (pro rata); the value of the assets in a
company does not change with a stock dividend
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20. For example, if a company pays a 10 percent stock
dividend, it gives each stockholder a number of new shares
equal to 10 percent of the number of shares the stockholder
already owns.
If an investor owns 100 shares, that investor receives 10
additional shares. An investor that owns 500 shares
receives 50 additional shares.
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21.  To the company  To the shareholders
1. Maintenance of liquidity 1. Increase in their equity
position 2. Marketability of shares
2. Satisfaction of shareholders increases
3. Enhance prestige 3. Increase in income
4. Widening the share for 4. Increase demand for shares
market
5. Finance for expansion
programmes
6. Conservation of control

22.  To the company  To the shareholder
1. It results in more liability 1. It lowers the market value
2. Denies other investors 2. Shareholders prefers cash
to shareholders dividend
3. Management control not 3. EPS also falls
diluted it may lead to
fraud

23. 3.Stock split
Stock split is a pro-rata distribution of new shares to existing
stockholders that is not associated with any change in the assets held
by the firm; stock splits involve larger increases in the number of
shares than stock dividends
A key distinction between stock dividends and stock splits is that stock
dividends are typically regularly scheduled events, like regular cash
dividends, whereas stock splits tend to occur infrequently during the
life of a company.
Companies usually split when they feel the market price is getting too
high for enough investors to buy it. When they split, the stock price
drops, which makes it more affordable.
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24. Stock splits are one of the least understood actions of the stock
market. Many new investors mistakenly believe that when a stock
splits it gives the stock holder twice as many shares as before at twice
the value.
While the stocks do split, increasing the number of shares, what is
often not understood is that the value of each of those shares is
reduced.
If a corporation decides to split its stock 2-for-1, it issues one new
share for each outstanding one. At the same time, the value of each
share is cut in half. So the stock holders now hold twice as many
shares but the total value is the same as before the split. A stock split
is like receiving 2 five-dollar bills for a single ten-dollar bill. Same value
– twice as much paper.
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25. For Example, X Company which is currently priced at $80 per share,
announces a 2-for-1 stock split. If you own 100 shares before the split
worth $8,000, you will own 200 shares worth $8,000 after the split.
The market automatically marks down the price of the stock by the
divisor of the split. The $80 per share price becomes $40 per share.
There are other splits such as 3-for-1 and 3-for-2, however 2-for-1
seems the most common.
In terms of what the company is worth, nothing changes.
So, why do it?
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26. Liquidity – If a stock’s price rises into the hundreds of dollars per share,
it may reduce the trading volume. Increasing the number of outstanding
shares at a lower per share price aids liquidity.
It is easier to sell stocks when they are lower in price and there is not
as much of a bid/ask spread.
Perception – Some companies worry when the per share price gets
too high that it will scare off some investors, especially small investors.
Splitting the stock brings the per share price down to a reasonable
level.
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27. 4. Stock repurchases – Stock Buybacks
The purchase of stock by a company from it stockholders; an
alternative way for the company to distribute value to the
stockholders
What if instead of using its excess cash to pay shareholders, a
company uses its excess cash to buy up or «buy back» its own
shares which are «floating» around the stock market (from
other shareholders, not from me)
Will that benefit the shareholders then?
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28. Example:
Big Banana Fruit Corporation has no debt and
$ 10.000 in assets,
divided into $ 6.000 equipment and
$ 4.000 cash.
It earns a total of $ 2.000 / year.
The Company has 10 shares of stock, meaning that each
share of stock earns $ 200 per year. Also, each share sells
at Share’s Worth = $10.000 Equity divided by 10 shares =
$1.000 per share.
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29. Bob is a shareholder in the company, owning 1 share of
stock, worth $1.000. So Bob owns 10 % of the company.
Another shareholder, Harry,
owns 2 shares of stock, worth
$2.000, or 20 % of the
company.
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30. The company decides to use $2.000 cash to «buy back» its
own company shares (2 shares) from Harry.
Because of this, the company’s equity drops from $10.000
to only $8.000, after it paid $2.000 cash to Harry.
Bob will still remain as a shareholder with only 1 share of
stock.
But now, there will only be 8 shares of stock left «floating»
in the market.
So Bob’s (with his 1 shares out of 8) will soon own 12.5 %
of the company. More than his original 10 % !!
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31. Does this help Bob ??
Before Stock After Stock
Repurchase Repurchase
1- Company earns $2.000 1- Company still earns
per year $2.000 per year
2- Bob owns 1 out of 10 2- Bob owns 1 out of 8
shares, or 10 % of the shares, or 12.5 % of the
company company
3- Bob’s 1 share earnings 3- Bob’s 1 share earnings
= 10% x $2.000 = $ 200 = 12.5% x $2.000 = $ 250
per year per year
EXTRA $50 per year 31

32. 1. Buying back stock means that the company earnings are now split
among fewer shares, meaning higher earnings per share (EPS).
Theoretically, higher earnings per share should command a higher
stock price which is great!
2. Buying back stock uses up excess cash. The returns on excess cash
in money market accounts can drag down overall company
performance. Cash rich companies are also very attractive takeover
targets. Buying back stock allows the company to earn a better return
on excess cash and keep itself from becoming a takeover target.
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33. 3. Buying back stock can increase the return on equity (ROE). This
effect is greater the more undervalued the shares are when they are
repurchased. If shares are undervalued, this may be the most
profitable course of action for the company.
4. When a company purchases its own stock it is essentially telling
the market that they think that the company’s stock is undervalued.
This can have a psychological effect on the market
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