Walter's model suggests that a firm's optimal dividend policy depends on the relationship between its cost of capital (k) and expected return on investments (r). If r > k, the firm should retain most earnings to fund new investments. If r < k, it should pay out most earnings in dividends. Gordon's model shows that a stock's price is determined by dividing expected future dividends by the difference between the required rate of return and growth rate. The Miller-Modigliani theorem suggests that a firm's value is unaffected by its dividend policy if markets are perfect and frictionless.
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Stewardship Theory, developed by Donaldson and Davis focuses on understanding the existing relationships between ownership and management of the company.
Under Stewardship theory managers are considered as Stewards which means someone who is responsible to protect and act in the best interest of shareholders.
It is opposite to agency theory which mentions the conflict of interest between managers and shareholders.
Managers are considered as committed to business, responsible, working towards accomplishment of mission and vision of organization.
They are the one who brings out collectivism in organization and align everyone’s objective for the growth of business.
Focuses on recognizing various groups in organization and empowers them with motivation and delegation of work.
Balances all stakeholders and add significant value to organization reputation.
There exist a strong relationship between managers and success of the company.
Stewards tries to maximize shareholders wealth by constantly increasing profitability and efficiency of business.
More control and restrictions over managers may lower their motivation and hence turn them out unproductive since they take most of the strategic decisions for growth of business in long run.
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Youtube Video Link -
https://youtu.be/dx28fuD_D4w
Stewardship Theory, developed by Donaldson and Davis focuses on understanding the existing relationships between ownership and management of the company.
Under Stewardship theory managers are considered as Stewards which means someone who is responsible to protect and act in the best interest of shareholders.
It is opposite to agency theory which mentions the conflict of interest between managers and shareholders.
Managers are considered as committed to business, responsible, working towards accomplishment of mission and vision of organization.
They are the one who brings out collectivism in organization and align everyone’s objective for the growth of business.
Focuses on recognizing various groups in organization and empowers them with motivation and delegation of work.
Balances all stakeholders and add significant value to organization reputation.
There exist a strong relationship between managers and success of the company.
Stewards tries to maximize shareholders wealth by constantly increasing profitability and efficiency of business.
More control and restrictions over managers may lower their motivation and hence turn them out unproductive since they take most of the strategic decisions for growth of business in long run.
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Subscribe to DevTech Finance
This analysis is an important tool used to optimize the capital structure for highest earnings for shareholders
It helps in understanding the sensitivity of EPS at given level of Earning before Interest & Tax under different sources of financing
It helps in analyzing how capital structure decision is important to raise the value of firm
An optimal financing structure minimizes the cost of capital and maximizes the earnings
Earning Per Share under different Capital structure plans
Plan 1 ( Only Equity Shares )
EPS = (EBIT (1−Tax rate))/(No. of Outstanding Shares)
Plan 2 ( Equity Shares & Debt )
EPS = ((EBIT −Interest) (1−Tax rate))/(No. of Outstanding Shares)
Plan 3 (Equity, Debt & Preference Shares)
EPS = ((EBIT −Interest) (1−Tax rate)−Pref. Dividend)/(No. of Outstanding Shares)
Plan 4 (Equity shares & Preference Shares)
EPS = (EBIT (1−Tax rate)−Pref. Dividend)/(No. of Outstanding Shares)
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This presentation is an overview of Capital Structure Theories.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
Introduction to financial planning
Meaning of financial planning
Definition of financial planning
Meaning of Financial Plan
Objectives of financial planning
Essentials/Characteristics of a sound financial plan
Considerations in formulating financial plan
Steps in financial planning
Limitations of financial planning
This analysis is an important tool used to optimize the capital structure for highest earnings for shareholders
It helps in understanding the sensitivity of EPS at given level of Earning before Interest & Tax under different sources of financing
It helps in analyzing how capital structure decision is important to raise the value of firm
An optimal financing structure minimizes the cost of capital and maximizes the earnings
Earning Per Share under different Capital structure plans
Plan 1 ( Only Equity Shares )
EPS = (EBIT (1−Tax rate))/(No. of Outstanding Shares)
Plan 2 ( Equity Shares & Debt )
EPS = ((EBIT −Interest) (1−Tax rate))/(No. of Outstanding Shares)
Plan 3 (Equity, Debt & Preference Shares)
EPS = ((EBIT −Interest) (1−Tax rate)−Pref. Dividend)/(No. of Outstanding Shares)
Plan 4 (Equity shares & Preference Shares)
EPS = (EBIT (1−Tax rate)−Pref. Dividend)/(No. of Outstanding Shares)
Thank You For Waching
Subscribe to DevTech Finance
This presentation is an overview of Capital Structure Theories.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
Introduction to financial planning
Meaning of financial planning
Definition of financial planning
Meaning of Financial Plan
Objectives of financial planning
Essentials/Characteristics of a sound financial plan
Considerations in formulating financial plan
Steps in financial planning
Limitations of financial planning
Dividend policy
What is Dividend?
What is dividend policy?
Theories of Dividend Policy
Relevant Theory
Walter’s Model
Gordon’s Model
Irrelevant Theory
M-M’s Approach
Traditional Approach
Referred to:
Prasanna Chandra
09 Chapter modelChapter 9. Stocks and Their Valuation (Models)Thi.docxhoney725342
09 Chapter modelChapter 9. Stocks and Their Valuation (Models)This model is similar to the bond valuation models developed in Chapter 7 in that we employ discounted cash flow analysis to find the value of a firm's stock.THE DISCOUNTED DIVIDEND MODEL (Section 9-4)The value of any financial asset is equal to the present value of future cash flows provided by the asset. Stocks can be evaluated in two ways: (1) by finding the present value of the expected future dividends, or (2) by finding the present value of the firm's expected future free cash flows, subtracting the market value of the debt and preferred stock to find the total value of the common equity, and then dividing that total value by the number of shares outstanding to find the value per share. Both approaches are examined in this spreadsheet.When an investor buys a share of stock, he/she typically expects to receive cash in the form of dividends and then, eventually, to sell the stock and to receive cash from the sale. Moreover, the price any investor receives is dependent upon the dividends the next investor expects to earn, and so on for different generations of investors. The basic dividend valuation equation is:P0 =D1+D2+. . . .Dn( 1 + rs )( 1 + rs ) 2( 1 + rs ) nThe dividend stream theoretically extends on out forever, i.e., n = infinity. It would not be feasible to deal with an infinite stream of dividends, but if dividends are expected to grow at a constant rate, we can use the constant growth equation as developed in the text to find the value.CONSTANT GROWTH STOCKS (Section 9-5)In the constant growth model, we assume that the dividend will grow forever at a constant growth rate. This is a very strong assumption, but for stable, mature firms, it can be reasonable to assume that the firm will experience some ups and downs throughout its life but those ups and downs balance each other out and result in a long-term constant rate. In addition, we assume that the required return for the stock is a constant. With these assumptions, the price equation for a common stock simplifies to the following expression:P 0 =D 1( r s − g )The long-run growth rate (g) is especially difficult to measure, but one approximates this rate by multiplying the firm's return on equity by the fraction of earnings retained, ROE x
(1 – Payout ratio). Generally speaking, the long-run growth rate is likely to fall between 5% and 8%.EXAMPLEAllied Food Products just paid a dividend of $1.15, and the dividend is expected to grow at a constant rate of 8.3%. What stock price is consistent with these numbers, assuming a 13.7% required return?D0$2.15g8.3%rs13.7%P0 =D1=D0 (1+g)=$2.33( rs − g )( rs − g )0.054P0 =$43.12STOCK PRICE SENSITIVITYOne of the keys to understanding stock valuation is knowing how various factors affect the stock price. We construct below a series of data tables and a graph to show how the stock price is affected by changes in the dividend, the growth rate, and rs. R ...
Dividend Policy resolves two questions:
Question 1: Does dividend policy affect firm value?
Question 2: If so, What is the optimal level of distribution ratio i.e., % Net Income to be distributed as dividend (Payout ratio). These issues are discussed under Irrelevance Theories (Modigliani and Miller’s Model) and
Relevance Theories (Walter’s Model , Gordon’s Model)
A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. Dividends are important for more than income generation: they also provide a way for investors to assess a company as an investment prospect. Dividend and market price of shares are interrelated. However, there are two schools of thought: while one school of thought opines that dividend has an impact on the value of the firm, another school argues that the amount of dividend paid has no effect on the valuation of firm.
The first school of thought refers to the Relevance of dividend while the other one relates to the Irrelevance of dividend.
Relevance includes: 1. Walter Valuation Model 2.GORDON’S MODEL.
2. Theories on Relationship between Dividend and Firm Value
Basic
Relevance
Gordon
WalterBasic
Theories
Walter
Irrelevance
Miller and
Modigliani
3. Relevance of Dividend for Firm Valuation Theories
Shareholders prefer current dividends and there is direct relationship
between dividend policy and market value of the firm depending upon its
growth stage.
WALTER’s MODEL
• Arguments:
– The relationship between r the (IRR) of the firms and k the cost of
capital of the firm . Firm would have optimum dividend policy
based on the relationship between r and k. , if r exceeds the k the
firm would retain the dividends (r>k not pay out) else it would pay
out.
– As long as there is a possibility to generate more wealth the firm
will not declare dividends (r>k). Such firms are called growth
firms.⸫ the dividend payout ratio =0%. OR,
– When r<k the shareholders may be given opportunity to maximise
their wealth from other avenues. ⸫ the dividend payout ratio
=100%. OR,
– Where r=k, managers will be indifferent and (Normal Firms) there
is no optimum dividend policy.
4. • Assumptions underlying Walter’s Model
– All financing is resorted to the retained earnings.
– There is no additional risk thus the r and k remain constant for
the new peoject.
– During the decision period the E= EPS and the D= Dividend Per
Share do not change for calculating firm value.
– Firm has perpetual life.
• Model :
P= Price of Equity shares, D= initial Dividend, ke=Cost of Equity capital,
g= expected growth rate of earnings.
– To capture earnings retentions we have :
– r= expected rate of returns of the firm or (IRR) , b = , retention rate
– ,
5. • Cost of Equity =
• Now: growth rate = change in Market Price of Equity ;
⸫ by substitution of value of g in ke equation we get :
Also, Change in Firm value measured in terms of change in Market value of shares
⸫ On substitution of value of ΔP we get for cost of equity⸫ On substitution of value of ΔP we get for cost of equity
And Firm value
6. From the following information show the effect of dividend policy of the firm on its Market price
of shares: Capitalisation rate, ke = 0.10 or 10%. Earnings Per Share = Rs 10.
Assume r = i) 15% , ii) 8%, and iii) 10%.
and D/P ratios i) 0% ii)25%, iii) 50%, iv)75%, v)100%
Solution (Proof)
EPS =E r ke
D/P ratio
=(1-b)
D= EPS
×(1-b)
E-D (E-D)
10 0.15 0.1 0 0 10 1.5 15 15 150
10 0.15 0.1 0.25 2.5 7.5 1.5 11.25 13.75 137.5
10 0.15 0.1 0.5 5 5 1.5 7.5 12.5 125
10 0.15 0.1 0.75 7.5 2.5 1.5 3.75 11.25 112.5
10 0.15 0.1 1 10 0 1.5 0 10 100
10 0.08 0.1 0 0 10 0.8 8 8 8010 0.08 0.1 0 0 10 0.8 8 8 80
10 0.08 0.1 0.25 2.5 7.5 0.8 6 8.5 85
10 0.08 0.1 0.5 5 5 0.8 4 9 90
10 0.08 0.1 0.75 7.5 2.5 0.8 2 9.5 95
10 0.08 0.1 1 10 0 0.8 0 10 100
10 0.1 0.1 0 0 10 1 10 10 100
10 0.1 0.1 0.25 5 5 1 5 10 100
10 0.1 0.1 0.5 7.5 2.5 1 2.5 10 100
10 0.1 0.1 0.75 10 0 1 0 10 100
10 0.1 0.1 1 0 10 1 10 10 100
It is observed that for r=ke the market price of share remains constant, r>ke the
Market Price of share increases with dividend retention ratio, and r<ke, Market Price
of share declines with increase in Dividend retention ratio.
7. EPS =E r ke
D/P ratio
=(1-b)
D=
EPS×(1-b)
E-D (E-D)
25 0.18 0.1 0 0 25 1.8 45 45 450
25 0.18 0.1 0.25 6.25 18.75 1.8 33.75 40 400
25 0.18 0.1 0.5 12.5 12.5 1.8 22.5 35 350
25 0.18 0.1 0.75 18.75 6.25 1.8 11.25 30 300
25 0.18 0.1 1 25 0 1.8 0 25 250
25 0.09 0.1 0 0 25 0.9 22.5 22.5 225
From the following information show the effect of dividend policy of the firm on its Market price
of shares
Capitalisation rate, ke = 0.10 or 10%. Earnings Per Share = Rs 25.
Assume r = i) 18% , ii) 9%, and iii) 10%.
and D/P ratios i) 0% ii)25%, iii) 50%, iv)75%, v)100%
Solution (Proof)
25 0.09 0.1 0 0 25 0.9 22.5 22.5 225
25 0.09 0.1 0.25 6.25 18.75 0.9 16.875 23.125 231.25
25 0.09 0.1 0.5 12.5 12.5 0.9 11.25 23.75 237.5
25 0.09 0.1 0.75 18.75 6.25 0.9 5.625 24.375 243.75
25 0.09 0.1 1 25 0 0.9 0 25 250
25 0.1 0.1 0 0 25 1 25 25 250
25 0.1 0.1 0.25 12.5 12.5 1 12.5 25 250
25 0.1 0.1 0.5 18.75 6.25 1 6.25 25 250
25 0.1 0.1 0.75 25 0 1 0 25 250
25 0.1 0.1 1 0 25 1 25 25 250
It is observed that for r=ke the market price of share remains constant, r>ke the
Market Price of share increases with dividend retention ratio, and r<ke, Market Price
of share declines with increase in Dividend retention ratio.
8. Gordon’s Dividend Capitalisation Model
• Assumptions:
• All equity Funded firm
• r and ke are constant
• The firm has perpetual life
• Retention ratio (D/P ratio)is constant. ⸫ growth rate, g=br is
constant.
• ke > br
Arguments
• Investors are risk averse. bird in a hand argument.• Investors are risk averse. bird in a hand argument.
• They penalise for uncertainty (charge premium for risk bearing)
• P= Price of a share, E= Earnings per share, b= percentage of
EPS retained,
⸫ (1-b) = Dividend Payout ratio,
ke= Capitalization rate or cost of capital.
br=g= Growth rate of the all equity firm
9. Solution
Given
EPS
Given
D/P ratio
=(1-b)
Given
ke
Given
r
b =(1-D/P
ratio)
br = g
ke- br
E × (1-b)
20 0.1 0.2 0.12 0.9 0.108 0.092 2 21.74
20 0.2 0.19 0.12 0.8 0.096 0.094 4 42.55
Example: Gordon’s Dividend Capitalisation Model.
From the following information about Hypo Ltd. r =0.12, EPS= Rs 20. Determine
the value of shares for
D/P ratio
=(1-b)
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
ke 0.2 0.19 0.18 0.17 0.16 0.15 0.14 0.13 0.12 0.11
20 0.2 0.19 0.12 0.8 0.096 0.094 4 42.55
20 0.3 0.18 0.12 0.7 0.084 0.096 6 62.5
20 0.4 0.17 0.12 0.6 0.072 0.098 8 81.63
20 0.5 0.16 0.12 0.5 0.06 0.1 10 100
20 0.6 0.15 0.12 0.4 0.048 0.102 12 117.65
20 0.7 0.14 0.12 0.3 0.036 0.104 14 134.62
20 0.8 0.13 0.12 0.2 0.024 0.106 16 150.94
20 0.9 0.12 0.12 0.1 0.012 0.108 18 166.67
20 1 0.11 0.12 0 0 0.11 20 181.82
It is observed that for given r and EPS with change in ke and D/P ratio the market
price of share changes. D/P ratio and Market price are positively related with
increasing ke the converse holds true.
10. Example: Gordon’s Dividend Capitalisation Model.
From the following information about Hypo Ltd. r =0.2, EPS= Rs 15. Determine
the value of shares for:
D/P ratio
=(1-b)
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
ke 0.2 0.19 0.18 0.17 0.16 0.15 0.14 0.13 0.12 0.11
Given
EPS
Given
D/P ratio
=(1-b)
Given
ke
Given
r
b =(1-D/P
ratio)
br = g
ke- br
E × (1-b)
15 0.1 0.2 0.2 0.9 0.18 0.02 1.5 75
15 0.2 0.19 0.2 0.8 0.16 0.03 3 100
15 0.3 0.18 0.2 0.7 0.14 0.04 4.5 112.5
Solution
15 0.3 0.18 0.2 0.7 0.14 0.04 4.5 112.5
15 0.4 0.17 0.2 0.6 0.12 0.05 6 120
15 0.5 0.16 0.2 0.5 0.1 0.06 7.5 125
15 0.6 0.15 0.2 0.4 0.08 0.07 9 128.57
15 0.7 0.14 0.2 0.3 0.06 0.08 10.5 131.25
15 0.8 0.13 0.2 0.2 0.04 0.09 12 133.33
15 0.9 0.12 0.2 0.1 0.02 0.1 13.5 135
15 1 0.11 0.2 0 0 0.11 15 136.36
It is observed that for given r and EPS with change in ke and D/P ratio the market
price of share changes. D/P ratio and Market price are positively related with
increasing ke
11. Miller M H and Modigliani F Dividend Irrelevance Theory
Value of a firm is indifferent to the distribution of profits. Firms value is purely a function
of the power of its assets and the underlying risk.
Assumptions
1. Perfect capital Markets
2. No taxes and Transaction Costs
3. Firms investment policy does noit change during the dividend decision period.
4. Investors are able to forecast the returns. (it was later dropped)
Argument :
Crux lies in arbitrage: The process of switching from one asset to another to
balance the risk and returns, is known as arbitrage. In this case the act of
dividend distribution is offset by issue of new stocks. This compensates the firm
with funds desired for investment.
Investment Avenue
Use Retained
Earnings
Arbitrage
Distribute retained Earnings and
Issue new Stock for amount
distributed.
12. Tenets
Investors are indifferent to the Dividend Payout : The amount dividend is declared the market
price of shares will decline, such a decline will be equal to sum of present value of
dividend received and the market value of shares.
Firms’ cost of capital won't affect the leverage and capital structure.
Proof :
Equation 1. Market Price of the shares in the beginning of the period equals the sum of PV
of Dividends and Market Price of shares.
P0 = Prevailing Market Price of Share
D1= Dividend received at the end of period 1,
P1= Market Price of share at the end of period , and ke= Cost of Equity Capital1 e
Equation 2. Assuming 100% Equity firm the capitalized value of the firm will be number of
shares (n) times the market price of shares :
Equation 3. If firm needs to resort to additional funds from external sources then Δn will be
the number of new shares issued at price P1 .
Total value of the firm is the sum of capitalized value of dividends due to be received at the
end of period 1, and difference between number of shares outstanding at the end of the
period 1 (including fresh issue) and value of new shares issued,
13. Equation 4. If the total of investment to be funded with new issue of shares:
ΔnP1 = Amounts collected from fresh proceeds
I = Funds for total Investment, ΔnD1 = Total Dividends Paid,
(E- nD1) = Retained Earnings.
5. On substitution of Equation 4 to Equation 3 we get
Equation 4 Equation 3
We get Equation 5
On solving we get
Since dividends are absent in Equation 6
we get that dividend dividends are irrelevant for determining firm value.
14. MM Co. Shares Trades @ Rs 200 with 20 Lakh shares outstanding . It has current income
of Rs 4 Crores with Rs20/- as EPS. Its earnings are earmarked for Investment. The Co.
announces dividends of Rs10/share, leaving Rs 2 Crores for capital investment. The
company resolves to issue another Rs2 Crores by fresh issue of shares. Find the following :
a) The issue price of new shares.
b) Number of Shares to be issued.
c) Value of the firm after the issue of new shares.
d) Value of Firm before and After New Issue.
Solution
If dividends are announced @ Rs 10/Share, before Fresh Issue ,If dividends are announced @ Rs 10/Share, before Fresh Issue ,
the Ex Dividend Price = 200-10=190.
The value of New Shares would be Rs 2 Crores = (Rs 10× 20,00,000 Shares)
Number of New Shares = =1,05,263.3
Total number of shares after Fresh Issue = 20,00,000 + 1,05,263 =21,05,263.
Total value of the MM Corp after Fresh Issue = 21,05,263.33 × Rs 190 = Rs 39,99,99,970
Approximately Rs 40 Crores .
So payment of Dividends is irrelevant for firm value
15. Example
Given : Existing shares 2,000, Current Price per share Rs500,
Expected returns 20% (ke). Retained Earnings Rs 6,00,000,
Investment needed Rs 10,00,000. Find the Market value of the firm,
for following dividend payment scenario per share in Rs: i) No
Dividend, ii) Rs 50, ii) Rs 75, iii)Rs100, iv) Rs125 v)Rs150 and
vi)Rs200.In case on no dividend is declared the projected price of
share would be
SolutionSolution
16. Given : Current Price of share Rs 500, r=20%, and 2000 Shares are outstanding
Proof of MM Dividend policy Irrelevance for Firm value
Dividend
Particulars
No
Dividend
50 75 100 125 150 200
Projected Price ={( Current Price (
1+r)) -Dividend Per Share}
600 550 525 500 475 450 400
Investment required in Rs 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Earnings Available in Rs 600,000 600,000 600,000 600,000 600,000 600,000 600,000
Dividend (Amount of Dividend × No
Existing Shares) in Rs
- 100,000 150,000 200,000 250,000 300,000 400,000
Post Dividend Retained Earnings
(Retained Earnings - Dividend
Payment) ion Rs
600,000 500,000 450,000 400,000 350,000 300,000 200,000
Additional Funds Needed ( Total
Capital needed -Amount of Dividend
announced) in Rs
400,000 500,000 550,000 600,000 650,000 700,000 800,000
No. of New Shares to be Issued (
Capital needed ÷ Ex Dividend Price)
666.67 909.09 1,047.62 1,200 1,368.42 1,555.56 2,000
Total Shares in The Firm ( 2000
+New Issue) Units
2,666.67 2,909.09 3,047.62 3,200.00 3,368.42 3,555.56 4,000
Market value of Firm (Total Shares
× Ex Dividend Price) in Rs
1,600,000 1,600,000 1,600,000 1,600,000 1,600,000 1,600,000 1,600,000
17. Given : Current Price of share Rs 300, r=0.15%, and 1000 Shares are outstanding , Investment required Rs 10 Lakhs
Proof of MM Dividend policy Irrelevance for Firm value ( Retained Earnings Rs 3 Lakhs)
Dividend
Particulars
No
Dividend
20 30 40 50 75 90
Projected Price ={( Current Price (
1+r)) -Dividend Per Share}
345 325 315 305 295 270 255
Investment required in Rs 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Earnings Available in Rs 300,000 300,000 300,000 300,000 300,000 300,000 300,000
Dividend (Amount of Dividend × No
Existing Shares) in Rs
0 20,000 30,000 40,000 50,000 75,000 90,000
Post Dividend Retained EarningsPost Dividend Retained Earnings
(Retained Earnings - Dividend Payment)
ion Rs
300,000 280,000 270,000 260,000 250,000 225,000 210,000
Additional Funds Needed ( Total Capital
needed -Amount of Dividend
announced) in Rs
700,000 720,000 730,000 740,000 750,000 775,000 790,000
No. of New Shares to be Issued ( Capital
needed ÷ Ex Dividend Price)
2028.99 2215.38 2317.46 2426.23 2542.37 2870.37 3098.04
Total Shares in The Firm ( 2000 +New
Issue) Units
3,028.99 3,215.38 3,317.46 3,426.23 3,542.37 3,870.37 4,098.04
Market value of Firm (Total Shares ×
Ex Dividend Price) in Rs
1,045,000 1,045,000 1,045,000 1,045,000 1,045,000 1,045,000 1,045,000
18. Alternative Forms of Dividend
• Capitalizing Reserves into shares, it changes the
form not the wealth of shareholders. Its Re-
organization of Shareholders Funds
• Impact on Book value of shares and Reserve and
Surplus. For Shareholders it’s a foresight of
incoming cash. Transaction cost is Zero
Bonus Shares
• Splitting the number of shares by increasing the
holding per share holder proportionately.
• Transaction cost is Zero, Wealth of shareholdersStock Splits • Transaction cost is Zero, Wealth of shareholders
in not affected.
Stock Splits
• The firm buys its own shares at a prescribed rate
from the willing shareholders. This enhances
control over the firm, and reflects firm’s wealth.
• The Process is subject to regulations.
Share Buy Back
19. References
Miller, M.H. and Modigliani, F. (1961) Dividend Policy, Growth, and the Valuation of Shares. The Journal of
Business, 34, 411-433.
Walter, J.E. (1963) Dividend Policy Its Influence on the Value of the Enterprise. The Journal of Finance, 18(2)
280-291.
Gordon, M. J. (1962). The Savings, Investment, and Valuation of a Corporation. Review of Economics and
Statistics, 44(1), 37-51.
Gordon M J(1963) Optimum Investment and Financing Policy, Journal of Finance, 18(3), 264-272
E F Brigham and Huston (1978) Fundamentals of Financial Management, South Western Publishers, NY USA.
E F Brigham and MC Erhardt (2016), Financial management Theory and Practice, 14 14th Edition, Cengage
Learning, Delhi ,India.
MY Khan and FM Jain (2014) Financial management Text Problems and Cases, Seventh Edition, Tata McGraw
Hills , New Delhi, India.
Prasanna Chandra (2002), Financial Management Theory and Practice, Fifth Edition, Tata McGraw Hills , NewPrasanna Chandra (2002), Financial Management Theory and Practice, Fifth Edition, Tata McGraw Hills , New
Delhi, India.
Rajiv Srivastava and Anil Misra(2013), Financial Management, Second Edition, Oxford Higher Education, New
Delhi, India.
G Sudarsana Reddy (2012) Financial Management , Principles and Practice , 3rd revised Edition, Himalaya
Publishing House, New Delhi, India.