, concept of dividend , dividend policy , stock dividend , stock repurchase , types of dividend policy , dividend model: if div fixed

1. Dividend Policy
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2. Concept of Dividend
It is a reward for the stockholders which is
distributed from the firm’s net earning & may be
generated either in current period, previous period
or both.
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3. Forms of Dividend
i) Cash Dividend: To pay dividend in the form of cash.
ii) Stock Dividend: To pay dividend in the form of
additional shares instead of cash.
iii) Stock Repurchase: To repurchase the outstanding
shares by the issuing firm.
iv) Stock Split: A method to increase the number of
outstanding shares through a proportional
reduction in the par value of the share.
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4. Stock dividend and stock splits attract considerable investors attention.
Stock dividend: Sometimes lack of hard cash leads the company to distribute
the dividend as share among the share holders instead of cash. This kind of
dividend is called stock dividend or bonus share. So, a payment by a
corporation in shares of stock rather than cash.
Stock dividend increases the number of issued shares.
On a 5% stock dividend the holder of 100 shares would receive an additional 5
shares. On a 20% stock dividend, the same holder would receive 20 new shares;
and so on.
Again the total number of shares is increased, so earnings , dividends, and
price per share all decline.
Stock Dividend

5. Stock Dividend
Example - Amoeba Products has 2 million shares currently outstanding
at a price of $15 per share. The company declares a 50% stock dividend.
How many shares will be outstanding after the dividend is paid?
Answer
2 mil x .50 = 1 mil + 2 mil = 3 mil shares
Suppose, Mr. X is the owner of 100 shares of Amoeba Products. That
means Mr. X will get another 50 shares. Now Mr. X will be the owner of
150 shares.
Answer
100 shares*50% = 50 shares
Now no. of shares is 100+50 = 150 shares.

6. Stock Dividend
Example - cont - After the stock dividend
what is the new price per share and
what is the new value of the firm?
Answer
 The value of the firm was 2 mil x $15
per share, or $30 mil. After the dividend
the value will remain the same.
 Price per share = $30 mil / 3 mil sh =
$10 per sh.

7. Stock dividend and stock splits attract considerable investors attention.
Stock Split: Issuance by a corporation of shares of common stock in proportion
to existing shares outstanding.
Stock split can be any size-for example the stock could be split two-for-
one,three-for-one,or in any other way.
Stock splits only have an impact on par value and the total number of shares. It
has no impact on the capitalization.
However on a practical basis there is little difference between a stock dividend
and stock split.
Stock Splits

8. Daffodil computers ltd. capital structure, 2007
Stock Splits
Ordinary share capital (10,000 shares*100) = 10,00,000
Share premium (10,000 shares*20) = 2,00,000
Reserve = 8,00,000
Total = 20,00,000
Ordinary share capital (20,000 shares*50) = 10,00,000
Share premium (20,000 shares*10) = 2,00,000
Reserve = 8,00,000
Total = 20,00,000
If the company divides its 10,000 shares to make it double then the rate per share will
be (100/2)=Tk. 50 that means if 1 share is converted into 2 shares, the structure will be:

9. Stock Repurchase
Assets Liabilities & Equity
B. After cash dividend
Cash $50,000 Debt 0
Other assets 850,000 Equity 900,000
Value of Firm 900,000 Value of Firm 900,000
Shares outstanding = 100,000
Price per share = $900,000 / 100,000 = $9
Example - Cash dividend versus share repurchase

10. Stock Repurchase
Assets Liabilities & Equity
C. After stock repurchase
Cash $50,000 Debt 0
Other assets 850,000 Equity 900,000
Value of Firm 900,000 Value of Firm 900,000
Shares outstanding = 90,000
Price per share = $900,000 / 90,000 = $10
Example - Cash dividend versus share repurchase

11. Dividend Payment Procedure
 Declaration Date: The date on which a firm’s
directors issue a statement declaring a dividend.
 Holder-of-Record Date: The date on which the
company closes its transfer books and makes up a
list of shareholders as of that date.
 Ex-Dividend Date: It is usually 1 working days prior
to the holder-of-record date and seller will receive
the declared dividend.
 Payment Date: The date on which a firm actually
mails dividend checks.
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12. Dividend Payments
Jul 28 Aug 10 Aug 11 Aug 13 Sept 10
Declaration With- Ex-dividend Record Payment
date dividend date date date
date
Share
price
falls

13. Dividend payment procedure.
Dividends are normally paid quarterly, and if conditions
permit,the dividend is increased once each year.For example
Mohim@k Corporation paid TK 10.00 per quarter in 2003 or at
an annual rate of TK 40.00. In late 2003 Mohim@k board of
directors met , reviewed projections and decided to keep the 1999
dividend at TK.40.00.
The actual payment procedure is as follows:
1. Declaration date. On the declaration date –say November 9 –
the directors meet and declare the regular dividend , issuing a
statement similar to the following: record

14. ‘ ‘ On November 9 ,2003, the directors of Mohim@k
Corporation met and declared the regular quarter dividend of
TK. 10.00 per share, payable to holders of record on December
11 , payment to be made on January 4,2004.’’ For accounting
purpose , the declared dividend becomes an actual liability on the
declaration date . If balance sheet were constructed, the amount
( TK. 10.00)*( Number of shares outstanding) would appear as a
current liability, and retained earnings would be reduced by a
like amount
Dividend payment procedure.(contd…)

15. 2. Holder-of–record date. At the close of the business on the
holder of record date , December 11, the company closes its stock
transfer books and makes up a list share-holders as of that date.If
Mohim@k Corporation is notified of the sale before 5 p.m. on
December 11 then the new owner receives the dividend. However if
notification is received on or after December 12, the previous
owner gets the dividend check.
3. Ex-dividend date. Suppose Sun Buyer buys 100 shares of stock
from Moon Seller on December 7. Will the company be notified of
the transfer in time to list Buyer as the new owner and thus pay the
dividend to her.
Dividend payment procedure.(contd…)

16. To avoid conflict , the securities industry has set up a convention
under which the right the dividend remains with the stock until
four business days prior to the holder-of-record date; on the
fourth day before that date the right to the dividend no longer
goes with the shares.
The date when the right to the dividend leaves the stock is
called the ex-dividend date.
In this case , the ex-dividend date is four days prior to December
11, or December 7:
Dividend payment procedure.(contd…)

17. Ex-dividend date:
Dividend goes with stock December 6 Buyer would receive the
dividend
------------------------------------------------------------------------------
December 7
December 8
December 9
December10
December11
Seller would receive the
dividend
------------------------------------------------------------------------------
Holder-of–record date:
Dividend payment procedure.(contd…)

18. Concept of Dividend Policy
 To distribute the profit among the share holders, the
company has to make decision that how much from the profit
will be given to the share holders and how much will be kept
with the company.
 To make this decision, a policy must be followed by the
company and this is called dividend policy.
It is concerned with determination of earnings (%) to be
distributed among the shareholders as dividend and the
amount (%) to be retained as retained earnings.
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19. Types of Dividend Policy
i) Stable Dividend Policy: It refers to payment of a specific
amount of dividend each dividend period increasing the
dividend at a constant rate.
ii) Constant Payout Ratio Policy: It refers to payment of a specific
percentage of earnings each dividend period.
iii) Residual Dividend Policy: As per this policy, dividend would be
provided if income is available is available after making
investment in profitable project/sector.
iv) Payment of Regular Dividend Plus Extra: A policy of paying a
low regular dividend plus a year –end extra in good year. Small
Constant Dividend per Share plus Extra Dividend
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20. Fluctuating Dividend Policy
According to this policy a certain ratio is used to calculate how much of
the profit will be given as the dividend. The ratio of dividend per share
and earnings per share is called the dividend payout ratio.
Dividend payout ratio = (Dividend per share/Earnings per share) * 100
Dividend per share is not constant every year under Fluctuating Dividend
policy. It depends on the amount of the after tax profit. Dividend payout
ratio may be same but because of the variation of the amount of profit,
the amount of dividend may vary year to year.
For example, DPR is 10%. This may be constant over year. Net profit
after tax over year is as follows:
Year After-tax Profit (‘000) DPS(‘000)
1 Tk. 200 20
2 Tk. 100 10
3 Tk. 150 15

21. Dividend Relevance vs.
Irrelevance Theory
As per dividend relevance theory, dividend has
influence on either its value or its cost of capital. On
the other hand, in case of dividend irrelevance
theory, dividend has no influence on either its value
or its cost of capital.
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22. Theory of Dividend Policy
i) Dividend Irrelevance Theory (MM Theory): As per
this theory, dividend policy does not affect a firm’s
value or its cost of capital.
For example:
If a firm does not pay dividends a shareholder who wants
a 5% div can create it by selling 5% of stock.
If a company pays a higher div than an investor desires,
the investor can use the unwanted div to buy
additional shares of the company’s stock.
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23. i) Bird-in-hand (Gordon & Linter Theory): They
argued that dividends are less risky than
capital gains, so a firm should set a high
dividend payout ratio and offer a high
dividend yield in order to maximize its stock
price.
ii) The Tax Preference Theory: As per this
theory, investors prefer retained earnings to
dividends because of the capital gains tax
preference situation.9/28/2019 23

24. Dividend model: If Div Fixed
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25. Dividend model: If Div Fixed
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26. Dividend Model: Gordon

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