Dividend policy

1. WELCOME
TO VIEWERS

2. A Presentation
On Behalf of Team
‘‘CURSORS of BUSINESS’’

3. We are the members of team
‘CURSORSofBUSINESS’
1. Jabed Hossain (L,52) 5. Tamanna Nigar Tuli (29)
2. Anjan Kumar Das (54) 6. Hasanuzzaman (37)
3. Md. Nazmul Haque (33) 7. Farjana Yasmin (78)
4. Salma Islam (24) 8. Sanzida Haque (11)

4. Presentation Title:
DIVIDEND POLICY

5. Contents:
 Definition of Dividend and Dividend Policy
 Objectives of Dividend Policy
 Factors that Affects Dividend Policy
 Stability of Dividend
 Forms of Stability
 Merits of Stability of Dividend
 Dangers of Stability of Dividend

6.  Forms of Dividend
 Advantages of Bonus Share
 Limitations of Bonus Share
 Bonus Share vs. Share Split
 Reasons for Share Split
 Share Split & Share Reverse Split
 Buyback of Shares

7.  Definition of Dividend:
A dividend is a distribution of a portion of a company's
earnings, decided by the board of directors, to a class of its
shareholders.
Dividends can be issued as cash payments, as shares of stock,
or other property.

8.  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.

9.  Objectives of Dividend Policy:
Wealth Maximization
Future Prospects
Stable Rate of Dividend
Degree of Control

10. I. Wealth Maximization:
According to some schools of thought dividend policy has
significant impact on the value of the firm. Therefore the
policy should be developed keeping in mind the wealth
maximization objective of the firm.

11. II. Future Prospects:
Dividend policy is a financing decision & leads to
cash outflows & also leads to decrease in availability
of cash for financing of profitable projects.
The policy needs to be sufficient fund to be devised
in such the prospective projects may be financed
through retained earnings.

12. III. Stable Rate of Dividends:
Fluctuation in the rate of return adversely affects the
marketing price of shares. In order to have a stable
rate of dividend, a firm should retain a high
proportion of earnings so that the firm can keep
sufficient funds for payment of dividend when it
faces loss.

13. IV. Degree of Control:
Issue of new shares or dependence on external
financing will dilute the degree of control of the
existing shareholders.
Therefore a conservative dividend policy should be
followed in order to the interest of existing
shareholders is not hampered.

14.  Factors Affecting Dividend Policy:
1. Legal Requirements
2. Firm’s Liquidity Position
3. Repayment Need
4. Expected Rate of Return
5. Stability of Earning
6. Desire of Control
7. Access to the Capital Market
8. Shareholder’s Individual Tax Decision

15. I. Legal Requirements:
There is no legal compulsion on the part of a
company to distribute dividend. There certain
conditions imposed by law regarding the way
dividend is distributed.
Three rules relating dividend payments are :-
 The net profit rule,
 The capital impairment rule &
 The insolvency rule.

16. II. Firms Liquidity Position:
Dividend policy affected by firms liquidity position.
In spite of sufficient retained earnings, the firm may
not be able to pay cash dividend if the earnings are
not held in cash.

17. III. Repayment Need:
Firm’s uses several forms of debt financing to meet
its investment needs. These debt must be repaid at
the maturity. If the firm has to retain its profits for
the purpose of repaying debt, the dividend payment
capacity reduces.

18. IV.Expected Rate of Return:
If a firm has higher expected rate of return on the
new investment, the firm prefers to retain the
earnings for reinvestment rather than distributing
cash dividend.

19. V. Stability of Earning:
If a firm has relatively stable earnings, it is more
likely to pay relatively larger dividend than a firm
with relatively fluctuating earnings.

20. VI. Desire of Control:
When the needs for additional financing arise, the
management of the firm may not prefer to issue
common stock because of the fear of dilution in
control of management.
Therefore a firm prefers to retain more earnings to
satisfy additional financing need which reduces
dividend payment policy

21. VII. Access to Capital Market:
If a firm easy to access to capital markets in raising
financing, it does not require more retained
earnings. So, a firm’s dividend payment capacity
become high.

22. VIII. Shareholder’s Individual Tax Situation:
For a closely held company, stockholders prefer
relatively lower cash dividend because of higher tax
to be paid on dividend income. The stockholders in
higher personal tax bracket prefer capital gain rather
than dividend gains.

23. Stability of Dividend:
Stability or regularity of dividends is considered as a
desirable policy by the management of most
companies. Stability of dividends sometimes means
regularity in paying some dividend annually, even
though the amount of dividend may fluctuate from
year to year and may not be related with earnings.

24.  Forms of Stability:
Three distinct forms of such stability may be
distinguished.
1. Constant dividend per share:
2. Constant percentage of net earnings
3. Small constant dividend per share plus extra
dividend

25.  Merits of Stability of Dividend:
Resolution of investor’s uncertainty
Investor’s desire for current income
Institutional investors’ requirements
Raising additional finances

26. Dangers of Stability of Dividends:
In spite of many advantages, the stable dividend
policy suffers from certain limitations. Once a stable
dividend policy is followed by a company, it is not
easier to change it.
Irregular Dividend Policy
No Dividend Policy:

27. Irregular Dividend Policy:
Some companies follow irregular dividend
payments on account of the following:
• (a) Uncertainty of earnings.
• (b) Unsuccessful business operations.
• (c) Lack of liquid resources.
• (d) Fear of adverse effects of regular
dividends on the financial standing of the
company.

28. No Dividend Policy:
A company may follow a policy of paying no
dividends presently because of its unfavorable
working capital position or on account of
requirements of funds for future expansion and
growth.

29. Forms of Dividend:
Most common forms of dividends are-
Cash Dividend &
Stock Dividend

30. Cash Dividend:
It is the most common form of payment and are paid out
in currency, usually via electronic funds transfer or
a printed paper check.
A company should have enough cash in
bank account when cash dividend are declared.
The cash account and reserve account of a
company will be reduced when the cash
dividend is paid. Thus both the total assets
and the net worth of the company are reduced when the
cash dividend is distributed.

31.  Stock Dividend:
Stock dividends are simply amount to distributions of additional
shares to existing shareholders. They represent nothing more
than recapitalization of earnings of the company. (i.e. 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 firms ability to pay dividends in the future.
It is also known as Bonus Share.

32.  Advantages of Bonus Share:
(A) For Shareholders:
(1) Immediately Realizable
(2) Not taxable
(3) Increase in future Income:
(4) Good Image increases the value in market

33. (B) For Company:
(1) Economical
(2) Wider Marketability
(3) Increase in Credit Worthiness
(4) More realistic Balance Sheet
(5) More Capital Availability
(6) Unaltered Liquidity Position

34.  Limitations of Bonus Share:
–1. Rate of dividend decline:
–2. Speculative dealing
–3. Forgoes Cash equivalent:
–4. Lengthy Procedure:

35.  Share Split:
A corporate action in which a company
divides its existing shares into multiple
shares. Although the number of shares
outstanding increases by a specific multiple,
the total dollar value of the shares remains
the same.
Also known as a "forward stock split."

36. While a split in theory should have no effect on
a stock's price, it often results in renewed
investor interest, which can have a positive
impact on the stock price.

37.  Reasons for Share Split:
 For making trading in shares attractive.
 to signal the possibility of higher profit in the
benefit.
 To give higher dividend to the shareholders.

38.  Bonus Share vs. Share Split:
 Bonus share is the additional share; whereas
share split simply divides existing outstanding
shares held by shareholders into multiple
share.
 In bonus issue, reserve capital of the company
decreases whereas share split does not affect
company’s reserve capital.

39.  In the share split, face value is also reduced in
the proportion of split but in bonus share, face
value does not get altered.

40.  Reverse Stock Split:
A corporate action in which a company
reduces the total number of its outstanding
shares . A reverse stock split involves the
company dividing its current shares by a
number such as 5 or 10, which would be called
a 1-for-5 or 1-for-10 split, respectively.

41.  Share Buyback:
A buyback, also known as a repurchase, is the
purchase by a company of its outstanding
shares that reduces the number of its shares on
the open market.

42. Companies buy back shares for a number of
reasons, such as to increase the value of shares
still available by reducing the supply of them
or eliminate any threats by shareholders who
may be looking for a controlling stake.

43. Thank you very much for your
patient hearing!!!

44. Any question?