This document discusses dividend policy and types of dividends. It defines dividend policy as a board's decision regarding distributing residual earnings to shareholders. Dividends can be paid in cash, additional shares, or property. The board has discretion over dividends, which are not a legal obligation. Dividends affect corporate financing and are considered when making financing decisions. The mechanics of cash dividend payments include a declaration date, record date, ex-dividend date, and payment date. Stock dividends and stock splits are also discussed.
Meaning of financial statement
Objectives of financial statement
Characteristics of financial statement
Nature of financial statement
Balance sheet
Format of balance sheet
Illustrations
Exercises
Statement of profit & loss
Format of statement of profit & loss
Notes of statement of profit &loss
Illustrations
Exercises
Business Finance: Introduction to Business Finance, Meaning and Definition of Financial Management, Objectives of Financial Management- (Profit Maximization and Wealth Maximization), Modern Approach to Financial Management- (Investment Decision, Financing Decision, Dividend Policy Decision), Finance and its relation with other disciplines, Functions of Finance Manager
What is Dividends
Types of cash dividends
Procedure for Dividend Payment
Ex-Dividend Date Is Important
Do Dividends Matter ?
DIVIDEND THEORIES
DIVIDENDS AND THE REAL WORLD
Dividends And Signaling
CLIENTELE EFFECT HYPOTHESIS
DIVIDEND POLICY PRACTICE
Residual dividend policy
DIVIDEND AND INVESTMENT POLICY
KEY FACTORS THAT INFLUENCE DIVIDEND POLICY
Meaning of financial statement
Objectives of financial statement
Characteristics of financial statement
Nature of financial statement
Balance sheet
Format of balance sheet
Illustrations
Exercises
Statement of profit & loss
Format of statement of profit & loss
Notes of statement of profit &loss
Illustrations
Exercises
Business Finance: Introduction to Business Finance, Meaning and Definition of Financial Management, Objectives of Financial Management- (Profit Maximization and Wealth Maximization), Modern Approach to Financial Management- (Investment Decision, Financing Decision, Dividend Policy Decision), Finance and its relation with other disciplines, Functions of Finance Manager
What is Dividends
Types of cash dividends
Procedure for Dividend Payment
Ex-Dividend Date Is Important
Do Dividends Matter ?
DIVIDEND THEORIES
DIVIDENDS AND THE REAL WORLD
Dividends And Signaling
CLIENTELE EFFECT HYPOTHESIS
DIVIDEND POLICY PRACTICE
Residual dividend policy
DIVIDEND AND INVESTMENT POLICY
KEY FACTORS THAT INFLUENCE DIVIDEND POLICY
Introduction to DuPont model. This presentation tries to understand the DuPont equation and explain its components. Author Sagnik Monga is Research Intern with Adroit Research.
Financial Reporting And Analysis Explained.as to why is it important, Who is it important for and the different ways of analyzing a financial statement.
Greenwich University
Chapter 1 Introduction to Financial ManagementSafeer Raza
Chapter 1 of Financial Management by Van horn
Introduction to Financial management
Topics
Introduction
What is Financial Management
Investment Decision
Financing decision
Asset management Decision
Goal of the firm
Value creation or profit maximization
wealth maximization
Agency problems
Corporate Social Responsibility
Corporate governance
Organization of the financial management function
How to create value for your organization? Why TSR is the best metric for value creation? Why is it difficult to create sustainable value? How to build sustainable value creation strategy & create value for a longer period of time? Why CSR & brand value change not consider as a part of TSR? Why multiple compressions are so difficult to beat? Why investors & analyst discounts valuation multiple? How to transit majority investors without eroding TSR? How to create value in low growth economy? How to play your strategy with sustainable TSR matrix as per investors eye? Why investors communication is so important for value creation? Which strategy you should use for value creation? How to use value creation scenarios? Why cash strategy is so important in low growth economy?
If all these question bothers you before developing your company’s corporate strategy/value creation strategy then you must see your New Year’s
complimentary gift presentation
“A handy e-book on how to create sustainable shareholders value”
This presentation contains slides on the topic financial management where I have discussed about the meaning of financial management, various financial decisions involved in it like the capital budgeting, capital structure, working capital management, dividend decision. I hope these slides would be beneficial in understanding the basics of finance in a better way.Capital budgeting is the investment decision ,capital structure is related to financing,working capital is more about liquidity and dividend decision is concerned with the shareholders.
Introduction to DuPont model. This presentation tries to understand the DuPont equation and explain its components. Author Sagnik Monga is Research Intern with Adroit Research.
Financial Reporting And Analysis Explained.as to why is it important, Who is it important for and the different ways of analyzing a financial statement.
Greenwich University
Chapter 1 Introduction to Financial ManagementSafeer Raza
Chapter 1 of Financial Management by Van horn
Introduction to Financial management
Topics
Introduction
What is Financial Management
Investment Decision
Financing decision
Asset management Decision
Goal of the firm
Value creation or profit maximization
wealth maximization
Agency problems
Corporate Social Responsibility
Corporate governance
Organization of the financial management function
How to create value for your organization? Why TSR is the best metric for value creation? Why is it difficult to create sustainable value? How to build sustainable value creation strategy & create value for a longer period of time? Why CSR & brand value change not consider as a part of TSR? Why multiple compressions are so difficult to beat? Why investors & analyst discounts valuation multiple? How to transit majority investors without eroding TSR? How to create value in low growth economy? How to play your strategy with sustainable TSR matrix as per investors eye? Why investors communication is so important for value creation? Which strategy you should use for value creation? How to use value creation scenarios? Why cash strategy is so important in low growth economy?
If all these question bothers you before developing your company’s corporate strategy/value creation strategy then you must see your New Year’s
complimentary gift presentation
“A handy e-book on how to create sustainable shareholders value”
This presentation contains slides on the topic financial management where I have discussed about the meaning of financial management, various financial decisions involved in it like the capital budgeting, capital structure, working capital management, dividend decision. I hope these slides would be beneficial in understanding the basics of finance in a better way.Capital budgeting is the investment decision ,capital structure is related to financing,working capital is more about liquidity and dividend decision is concerned with the shareholders.
The dividend policies of an organization have a significant bearing on the market value of stocks. Companies must distribute dividends in line with the industry standards and previously distributed dividends by the company. The shareholders will otherwise perceive this variability negatively. It casts suspicion on the financial health and motives of the management (signaling effect). In aggregate, an inefficient dividend decision mechanism would adversely impact the valuation of the company.
Table of Contents
What are Dividend Decisions?
Impact of Dividend Decisions on Price
Factors affecting Dividend Decisions
Cash Requirement
Evaluation of Price Sensitivity
Stage of Growth
Good Dividend Policy
Importance of Dividend Decisions
Q. How much Dividend should a Company Distribute to its Shareholders?
Q. What will be the Impact of Dividend Decisions on the Share Prices of the Company?
Q. What is the Consequential Impact of Inability to Maintain Dividend Year after Year?
Types of Dividend Decision
Stable Dividends
Constant Dividends
Alternate Dividend Decisions
Factors affecting Dividend Decisions
Cash Requirement
The financial manager must take into account the capital fund requirements while framing a dividend policy. Generous distribution of dividends in capital-intensive periods may put the company in financial distress.
Evaluation of Price Sensitivity
Companies chosen by investors for their regularity of dividends must have a more stringent dividend policy than others. It becomes essential for such companies to take effective dividend decisions for maintaining stock prices.
Stage of Growth
Dividend decisions must be in line with the stage of the company- infancy, growth, maturity & decline. Each stage undergoes different conditions and therefore calls for different dividend decisions.
Good Dividend Policy
What Constitutes a Good Dividend Policy?
There does not exist a single dividend decision process that works for every organization. A decision suitable for one company may prove fatal for another company. For example, businesses with a consistent order book such as telecom and banking are expected to pay regular dividends. It may impact the stock prices if they do not pay dividends regularly. On the contrary, sectors of pharmaceutical and technology are highly research-oriented. These require huge cash expenses to further their operations. Therefore they cannot afford to pay a regular dividend. Investors of such stocks earn income mainly through capital appreciation. In essence, there are a lot of factors affecting dividend policy or decisions.
We can refer to the following renowned theories on Dividend Policy:
Modigliani- Miller Theory on Dividend Policy
Gordon’s Theory on Dividend Policy
Walter’s Theory on Dividend Policy
A good financial manager must, therefore, answer the following questions before taking crucial dividend decisions
Importance of Dividend Decisions
While deciding the distribution of dividends, management has to answe
he financing decision is a strategic process that involves evaluating different sources of capital, considering their costs and risks, and determining the optimal mix to achieve the company's financial objectives.
3. CHAPTER 22 – Dividend Policy 22 - 3
Dividend Policy
What is It?
• Dividend Policy refers to the explicit or implicit
decision of the Board of Directors regarding
the amount of residual earnings (past or
present) that should be distributed to the
shareholders of the corporation.
– This decision is considered a financing decision
because the profits of the corporation are an
important source of financing available to the
firm.
5. CHAPTER 22 – Dividend Policy 22 - 5
Types of Dividends
• Dividends are a permanent distribution of residual
earnings/property of the corporation to its owners.
• Dividends can be in the form of:
– Cash
– Additional Shares of Stock (stock dividend)
– Property
• If a firm is dissolved, at the end of the process, a final dividend of
any residual amount is made to the shareholders – this is known as
a liquidating dividend.
7. CHAPTER 22 – Dividend Policy 22 - 7
– In the absence of dividends, corporate earnings accrue to the benefit of
shareholders as retained earnings and are automatically reinvested in the
firm.
– When a cash dividend is declared, those funds leave the firm permanently and
irreversibly.
– Distribution of earnings as dividends may starve the company of funds
required for growth and expansion, and this may cause the firm to seek
additional external capital.
Corporate Profits After Tax
Retained Earnings
Dividends
Dividends a Financing Decision
8. CHAPTER 22 – Dividend Policy 22 - 8
Dividends versus Interest Obligations
Interest
• Interest is a payment to lenders for the use of their funds for a given period of time
• Timely payment of the required amount of interest is a legal obligation
• Failure to pay interest (and fulfill other contractual commitments under the bond
indenture or loan contract) is an act of bankruptcy and the lender has recourse
through the courts to seek remedies
• Secured lenders (bondholders) have the first claim on the firm’s assets in the case of
dissolution or in the case of bankruptcy
Dividends
• A dividend is a discretionary payment made to shareholders
• The decision to distribute dividends is solely the responsibility of the board of directors
• Shareholders are residual claimants of the firm (they have the last, and residual claim
on assets on dissolution and on profits after all other claims have been fully satisfied)
10. CHAPTER 22 – Dividend Policy 22 - 10
Dividend Payments
Mechanics of Cash Dividend Payments
• Declaration Date
• Holder of Record Date
• Ex-dividend Date
• Payment Date
11. CHAPTER 22 – Dividend Policy 22 - 11
Dividend Payments
Mechanics of Cash Dividend Payments
Declaration Date
– this is the date on which the Board of Directors meet and declare the dividend. In their resolution
the Board will set the date of record, the date of payment and the amount of the dividend for each
share class.
– when CARRIED, this resolution makes the dividend a current liability for the firm.
Date of Record
– is the date on which the shareholders register is closed after the trading day and all those who are
listed will receive the dividend.
Ex dividend Date
– is the date that the value of the firm’s common shares will reflect the dividend payment (ie. fall in
value)
– ‘ex’ means without.
– At the start of trading on the ex-dividend date, the share price will normally open for trading at the
previous days close, less the value of the dividend per share. This reflects the fact that purchasers
of the stock on the ex-dividend date and beyond WILL NOT receive the declared dividend.
Date of Payment
– is the date the cheques for the dividend are mailed out to the shareholders.
13. CHAPTER 22 – Dividend Policy 22 - 13
Dividend Policy
Dividends, Shareholders and the Board of Directors
• There is no legal obligation for firms to pay dividends to common
shareholders
• Shareholders cannot force a Board of Directors to declare a
dividend, and courts will not interfere with the BOD’s right to make
the dividend decision because:
– Board members are jointly and severally liable for any damages they
may cause
– Board members are constrained by legal rules affecting dividends
including:
• Not paying dividends out of capital
• Not paying dividends when that decision could cause the firm to become
insolvent
• Not paying dividends in contravention of contractual commitments (such
as debt covenant agreements)
15. CHAPTER 22 – Dividend Policy 22 - 15
Dividend Payments
Dividend Reinvestment Plans (DRIPs)
• Involve shareholders deciding to use the cash dividend
proceeds to buy more shares of the firm
– DRIPs will buy as many shares as the cash dividend allows with the
residual deposited as cash
– Leads to shareholders owning odd lots (less than 100 shares)
• Firms are able to raise additional common stock capital
continuously at no cost and fosters an on-going relationship
with shareholders.
16. CHAPTER 22 – Dividend Policy 22 - 16
Dividend Payments
Stock Dividends
• Stock dividends simply amount to distribution of additional
shares to existing shareholders
• They represent nothing more than recapitalization of earnings
of the company. (that is, the amount of the stock dividend is
transferred from the R/E account to the common share
account.
• Because of the capital impairment rule stock dividends
reduce the firm’s ability to pay dividends in the future.
17. CHAPTER 22 – Dividend Policy 22 - 17
Dividend Payments
Stock Dividends
Implications
– reduction in the R/E account
– reduced capacity to pay future dividends
– proportionate share ownership remains unchanged
– shareholder’s wealth (theoretically) is unaffected
Effect on the Company
– conserves cash
– serves to lower the market value of firm’s stock modestly
– promotes wider distribution of shares to the extent that current owners divest themselves of
shares...because they have more
– adjusts the capital accounts
– dilutes EPS
Effect on Shareholders
– proportion of ownership remains unchanged
– total value of holdings remains unchanged
– if former DPS is maintained, this really represents an increased dividend payout
18. CHAPTER 22 – Dividend Policy 22 - 18
Dividend Payments
Stock Dividend Example
ABC Company
Equity Accounts
as at February xx, 20x9
Common stock (215,000) $5,000,000
Retained earnings 20,000,000
Net Worth $25,000,000
The company, on March 1, 20x9 declares a 10 percent stock dividend when the current market price for
the stock is $40.00 per share.
This stock dividend will increase the number of shares outstanding by 10 percent. This will mean issuing
21,500 shares. The value of the shares is:
$40.00 (21,500) = $860,000
This stock dividend will result in $860,000 being transferred from the retained earnings account to the
common stock account:
next page...
19. CHAPTER 22 – Dividend Policy 22 - 19
Dividend Payments
Stock Dividend Example
ABC Company
Equity Accounts
as at February xx, 20x9
Common stock (215,000) $5,000,000
Retained earnings 20,000,000
Net Worth $25,000,000
The company, on March 1, 20x9 declares a 10 percent stock dividend when the current market price for
the stock is $40.00 per share.
This stock dividend will increase the number of shares outstanding by 10 percent. This will mean issuing
21,500 shares. The value of the shares is:
$40.00 (21,500) = $860,000
This stock dividend will result in $860,000 being transferred from the retained earnings account to the
common stock account:
next page...
20. CHAPTER 22 – Dividend Policy 22 - 20
Dividend Payments
Stock Dividend Example
After the stock dividend:
ABC Company
Equity Accounts
as at March 1, 20x9
Common stock (236,500) $5,860,000
Retained earnings 19,140,000
Net worth $25,000,000
The market price of the stock will be affected by the stock dividend:
New Share Price = Old Price/ (1.1) = $40.00/1.1 = $36.36
The individual shareholder’s wealth will remain unchanged.
21. CHAPTER 22 – Dividend Policy 22 - 21
Dividend Payments
Stock Splits
• Although there is no theoretical proof, there is some who believe
that an optimal price range exists for a company’s common shares.
• It is generally felt that there is greater demand for shares of
companies that are traded in the $40 - $80 dollar range.
• The purpose of a stock split is to decrease share price.
• The result is:
– increase in the number of share outstanding
– theoretically, no change in shareholder wealth
• Reasons for use:
– better share price trading range
– psychological appeal (signalling affect)
22. CHAPTER 22 – Dividend Policy 22 - 22
Dividend Payments
Stock Split Example
The Board of Directors of XYZ Company is considering using a stock split to put its
shares into a better trading range. They are confident that the firm’s stock price will
continue to rise given the firm’s outstanding financial performance. Currently, the
company’s shares are trading for $150 and the company’s shareholders equity
accounts are as follows:
Commons shares (100,000 outstanding) $1,500,000
Retained earnings 15,000,000
Net Worth $16,500,000
A 2 for 1 Stock Split:
New Share Price = P0[1/(2/1)] = $150[1/(2/1)] = $150[.5] = $75.00
The firm’s equity accounts:
Commons shares (200,000 outstanding) $1,500,000
Retained earnings 15,000,000
Net Worth $16,500,000
23. CHAPTER 22 – Dividend Policy 22 - 23
Dividend Payments
Further Stock Split Examples
A 4 for 3 Stock Split:
New Share Price = P0[1/(4/3)] = $150[1/(4/3)] = $150[.75] = $112.50
The firm’s equity accounts:
Commons shares (133,333 outstanding) $1,500,000
Retained earnings 15,000,000
Net Worth $16,500,000
A 3 for 4 Reverse Stock Split:
New Share Price = P0[1/(3/4)] = $150[1/(3/4)] = $150[1.33] = $200.00
The firm’s equity accounts:
Commons shares (75,000 outstanding) $1,500,000
Retained earnings 15,000,000
Net Worth $16,500,000
Clearly the Board can use stock splits and reverse stock splits to place the firm’s stock in a particular
trading range.
24. CHAPTER 22 – Dividend Policy 22 - 24
Dividend Payments
Stock Split Effects
• shareholders wealth should remain unaffected:
Original Holdings: (100 shares @ $150/share) = $15,000
After a 4 for 1 split: (400 shares @ $37.50/share) = $15,000
• the above will hold true if there is no psychological appeal to
the stock split.
• There is some evidence that the share price of companies
which split stock is more bouyant because of a positive signal
being transferred to the market by this action.
25. CHAPTER 22 – Dividend Policy 22 - 25
- lowers stock price slightly - large drop in stock price
- little psychological appeal - much stronger potential
signalling effect
- recapitalization of earnings - no recapitalization
- no change in proportional - same
ownership
- odd lots created - odd lots rare
- theoretically, no value to - same
the investor
Stock Dividends versus Stock Splits
Stock Dividends Stock Splits
26. CHAPTER 22 – Dividend Policy 22 - 26
Dividend Payments
Stock Dividend Example
ABC Company
Equity Accounts
as at February xx, 20x9
Common stock (215,000) $5,000,000
Retained earnings 20,000,000
Net Worth $25,000,000
The company, on March 1, 20x9 declares a 10 percent stock dividend when the current market price for
the stock is $40.00 per share.
This stock dividend will increase the number of shares outstanding by 10 percent. This will mean issuing
21,500 shares. The value of the shares is:
$40.00 (21,500) = $860,000
This stock dividend will result in $860,000 being transferred from the retained earnings account to the
common stock account:
next page...
27. CHAPTER 22 – Dividend Policy 22 - 27
Dividend Payments
Stock Dividend Example
After the stock dividend:
ABC Company
Equity Accounts
as at March 1, 20x9
Common stock (236,500) $5,860,000
Retained earnings 19,140,000
Net worth $25,000,000
The market price of the stock will be affected by the stock dividend:
New Share Price = Old Price/ (1.1) = $40.00/1.1 = $36.36
The individual shareholder’s wealth will remain unchanged.
28. CHAPTER 22 – Dividend Policy 22 - 28
Dividend Payments
Stock Splits
• Although there is no theoretical proof, there is some who believe
that an optimal price range exists for a company’s common shares.
• It is generally felt that there is greater demand for shares of
companies that are traded in the $40 - $80 dollar range.
• The purpose of a stock split is to decrease share price.
• The result is:
– increase in the number of share outstanding
– theoretically, no change in shareholder wealth
• Reasons for use:
– better share price trading range
– psychological appeal (signalling affect)
29. CHAPTER 22 – Dividend Policy 22 - 29
Dividend Payments
Stock Split Example
The Board of Directors of XYZ Company is considering using a stock split to put its
shares into a better trading range. They are confident that the firm’s stock price will
continue to rise given the firm’s outstanding financial performance. Currently, the
company’s shares are trading for $150 and the company’s shareholders equity
accounts are as follows:
Commons shares (100,000 outstanding) $1,500,000
Retained earnings 15,000,000
Net Worth $16,500,000
A 2 for 1 Stock Split:
New Share Price = P0[1/(2/1)] = $150[1/(2/1)] = $150[.5] = $75.00
The firm’s equity accounts:
Commons shares (200,000 outstanding) $1,500,000
Retained earnings 15,000,000
Net Worth $16,500,000
30. CHAPTER 22 – Dividend Policy 22 - 30
Dividend Payments
Further Stock Split Examples
A 4 for 3 Stock Split:
New Share Price = P0[1/(4/3)] = $150[1/(4/3)] = $150[.75] = $112.50
The firm’s equity accounts:
Commons shares (133,333 outstanding) $1,500,000
Retained earnings 15,000,000
Net Worth $16,500,000
A 3 for 4 Reverse Stock Split:
New Share Price = P0[1/(3/4)] = $150[1/(3/4)] = $150[1.33] = $200.00
The firm’s equity accounts:
Commons shares (75,000 outstanding) $1,500,000
Retained earnings 15,000,000
Net Worth $16,500,000
Clearly the Board can use stock splits and reverse stock splits to place the firm’s stock in a particular
trading range.
31. CHAPTER 22 – Dividend Policy 22 - 31
Dividend Payments
Stock Split Effects
• shareholders wealth should remain unaffected:
Original Holdings: (100 shares @ $150/share) = $15,000
After a 4 for 1 split: (400 shares @ $37.50/share) = $15,000
• the above will hold true if there is no psychological appeal to
the stock split.
• There is some evidence that the share price of companies
which split stock is more bouyant because of a positive signal
being transferred to the market by this action.
32. CHAPTER 22 – Dividend Policy 22 - 32
- lowers stock price slightly - large drop in stock price
- little psychological appeal - much stronger potential
signalling effect
- recapitalization of earnings - no recapitalization
- no change in proportional - same
ownership
- odd lots created - odd lots rare
- theoretically, no value to - same
the investor
Stock Dividends versus Stock Splits
Stock Dividends Stock Splits
33. CHAPTER 22 – Dividend Policy 22 - 33
Cash Dividend Payments
The Macro Perspective
• Figure 22 -1 illustrates:
– Aggregate after-tax profits run at approximately 6% of GDP but are
highly variable
– Aggregate dividends are relatively stable when compared to after-tax
profits.
• They are sustained in the face of drops in profit during recessions
• They are held reasonably constant in the face of peaks in aggregate
profits.
(See Figure 22 - 1 on the following slide)