3. Dividend Policy
Dividend refers to that net profits of a company which
distributed among shareholders as a return on their
investment in the company. Dividend is paid on preference
as well as equity shares of company.
Thus the dividend policy divide the net profits or earnings
after taxes into two parts :
1. Earnings to be distributed as dividend
2. Earnings retained in the business
4. Kinds Of Dividends
1. Cash Dividend
2. Stock Dividend or Bonus Shares
3. Scrip Dividend
4. Bond Dividend
5. Property Dividend
6. Liquidating Dividend
5. Types Of Dividend Policy
1. Stable Dividend Policy
2. Low Regular Dividends Plus Extra
Dividends Policy
3. Dividends Fluctuating With Earnings
Policy
4. Policy Of No Dividend at Present
6. Stable Dividend Policy
The term ‘stability of dividends’ refers to the consistency or lack of
variability in the stream of dividend payments. It means that a certain
minimum amount of dividend is paid out each year.
Three Forms Of Stability Of Dividend :
1. Constant Dividend Per Share
2. Constant Dividend Payout Ratio
3. Constant Dividend Per Share Plus Extra Dividend
7. Significance Of Stability Of
Dividends
1. Fulfilment of Investor’s Desire For current
Income
2. Resolution of Investor’s Uncertainty
3. Requirements of Institutional Investor’s
4. Raising Additional Finances
5. Helpful In Long Term Financial Planning
8. Factors Determining Dividend
Policy
1. Financial Needs of the Firm
2. Stability of Dividends
3. Legal Restrictions
4. Restrictions in Loan Agreements
5. Liquidity
6. Acess to Capital Market
7. Stability Of Earnings
8. Objective Of Maintaining Control
9. Effect On Earning Per Share
10. Inflation
9. Dividend Policy Theories
These Theories Categories in two groups :
1. Thories for Relevance Of Dividend Decision.
(a) Water’s Model
(b) Gordon’s Model.
2. Thories for Irrelevance of Dividend Decision.
(a) Modigliani and Miller Hypothesis.
10. The Walter Model Relationship
Between
The Following Two Factors
(a). The return on firm’s Investment or its internal rate of return (r)
and
(b). Its cost of capital or the required rate of return (Ke).
1. (r>Ke) rate of return is greater than cost of capital.
2. (r<Ke) rate of return is less than from cost of capital.
11. Assumptions of Walter’s Model
1. Constant return of capital
2. Internal financing
3. 100% payout or retention
4. Constant earnings per share and constant Dividend Per Share
5. Infinite time
12. Limitations of Walter’s Model
1. No External Financing
2. Constant rate of return
3. Constant equity capitalisition rate
13. Assumptions of Gordon’s Model
1. No external financing
2. All equity firm
3. No taxes
4. Prepetual Earnings
5. Constant internal rate of return
6. Constant cost of capital
7. Constant retention Ratio
14. Assumptions of Modigliani and
Miller Hypothesis theory
1. Perfect capital Markets
2. No taxes
3. Fixed investment policy
4. Certainly Of earnings
