This document discusses dividend theory and policy. It explains that in the absence of dividends, corporate earnings accrue to shareholders as retained earnings that are automatically reinvested in the firm. However, when dividends are declared, those funds leave the firm permanently. The document then outlines several factors that determine a firm's dividend policy, including dividend payout ratio, stability of dividends, legal restrictions, and owners' considerations. It provides examples and explanations of different types of dividend payments, including cash dividends, stock dividends, stock splits, and share repurchases.
This document discusses several theories of dividend decision-making:
- Walter's model states that share price is the sum of dividends and retained earnings discounted by the cost of equity. It suggests retaining earnings if return on investment exceeds the cost of equity.
- Gordon's model similarly values shares based on dividends but also incorporates the growth rate of earnings from retained profits. It argues investors prefer dividends over capital gains.
- The Miller-Modigliani hypothesis asserts that under perfect capital markets, dividend policy does not affect share price, as investors will value future cash flows regardless of payout method.
The document discusses funds flow statements and their preparation. It provides definitions of key terms like working capital and flow of funds. It explains that a funds flow statement depicts changes in working capital between two balance sheet dates by analyzing changes in current assets and current liabilities. The summary also shows how to prepare schedules of changes in working capital and sources and uses of funds statements to analyze the flow of funds.
The document discusses dividend policy and provides details about:
1. The meaning of dividend and dividend policy, and factors that affect dividend policy such as ownership considerations, nature of business, and investment opportunities.
2. Different types of dividends including cash dividend, stock dividend, property dividend, and debenture dividend.
3. Dividend policies of 5 major Indian IT companies - Tata Consultancy Services, Wipro, Infosys, HCL Technologies, and Larsen & Toubro Infotech - and their dividend yields for the fiscal year 2013.
There are several types of dividend policies a company can adopt:
1. A regular dividend policy pays dividends at a usual rate and is preferred by retired investors who need steady income. It requires long-standing, stable earnings.
2. A stable dividend policy aims to consistently pay dividends, through methods like a constant dividend per share, constant payout ratio, or stable low dividend plus extra in high-profit years.
3. An irregular dividend policy is used when earnings are uncertain or the company lacks liquid resources. A no dividend policy may be adopted if working capital is unfavorable or funds are needed for future growth.
The document summarizes the Modigliani-Miller theory of dividend policy. Some key points:
1) According to the theory, the value of a firm is based solely on its earnings and investment policy, not its dividend policy. Whether a firm retains earnings or pays dividends, the total return to shareholders is the same.
2) The theory is based on assumptions of perfect capital markets, no taxes, fixed investment policy, and no uncertainty.
3) Through mathematical proofs, the theory shows that dividends do not appear in the final equation determining a firm's value, indicating dividend policy is irrelevant to shareholders.
4) However, the theory is criticized for being based on unrealistic
Investment involves committing funds with the aim of achieving additional income or growth in value over time. It is characterized by risk, return, safety, liquidity, and tax benefits. The key aspects are committing funds for a future reward, an expectation of returns higher than realized returns due to uncertainty, and balancing risk and return based on one's objectives and capacity. Investment aims to maximize returns while minimizing risk through prudent analysis, whereas speculation takes greater risks seeking short-term capital gains.
The document discusses several theories on corporate dividend policies:
1. Dividend relevance theories argue that a firm's dividend policy impacts its value. Walter's and Gordon's models show how value is determined based on factors like earnings, dividends, growth rates, and costs of capital.
2. Dividend irrelevance theories, proposed by Modigliani and Miller, state that a firm's value depends only on its investment policy, not its dividend policy.
3. The bird-in-hand theory suggests that even in situations of equal growth rates and costs of capital, investors prefer dividends in-hand to future capital gains due to uncertainty.
This document discusses several theories of dividend decision-making:
- Walter's model states that share price is the sum of dividends and retained earnings discounted by the cost of equity. It suggests retaining earnings if return on investment exceeds the cost of equity.
- Gordon's model similarly values shares based on dividends but also incorporates the growth rate of earnings from retained profits. It argues investors prefer dividends over capital gains.
- The Miller-Modigliani hypothesis asserts that under perfect capital markets, dividend policy does not affect share price, as investors will value future cash flows regardless of payout method.
The document discusses funds flow statements and their preparation. It provides definitions of key terms like working capital and flow of funds. It explains that a funds flow statement depicts changes in working capital between two balance sheet dates by analyzing changes in current assets and current liabilities. The summary also shows how to prepare schedules of changes in working capital and sources and uses of funds statements to analyze the flow of funds.
The document discusses dividend policy and provides details about:
1. The meaning of dividend and dividend policy, and factors that affect dividend policy such as ownership considerations, nature of business, and investment opportunities.
2. Different types of dividends including cash dividend, stock dividend, property dividend, and debenture dividend.
3. Dividend policies of 5 major Indian IT companies - Tata Consultancy Services, Wipro, Infosys, HCL Technologies, and Larsen & Toubro Infotech - and their dividend yields for the fiscal year 2013.
There are several types of dividend policies a company can adopt:
1. A regular dividend policy pays dividends at a usual rate and is preferred by retired investors who need steady income. It requires long-standing, stable earnings.
2. A stable dividend policy aims to consistently pay dividends, through methods like a constant dividend per share, constant payout ratio, or stable low dividend plus extra in high-profit years.
3. An irregular dividend policy is used when earnings are uncertain or the company lacks liquid resources. A no dividend policy may be adopted if working capital is unfavorable or funds are needed for future growth.
The document summarizes the Modigliani-Miller theory of dividend policy. Some key points:
1) According to the theory, the value of a firm is based solely on its earnings and investment policy, not its dividend policy. Whether a firm retains earnings or pays dividends, the total return to shareholders is the same.
2) The theory is based on assumptions of perfect capital markets, no taxes, fixed investment policy, and no uncertainty.
3) Through mathematical proofs, the theory shows that dividends do not appear in the final equation determining a firm's value, indicating dividend policy is irrelevant to shareholders.
4) However, the theory is criticized for being based on unrealistic
Investment involves committing funds with the aim of achieving additional income or growth in value over time. It is characterized by risk, return, safety, liquidity, and tax benefits. The key aspects are committing funds for a future reward, an expectation of returns higher than realized returns due to uncertainty, and balancing risk and return based on one's objectives and capacity. Investment aims to maximize returns while minimizing risk through prudent analysis, whereas speculation takes greater risks seeking short-term capital gains.
The document discusses several theories on corporate dividend policies:
1. Dividend relevance theories argue that a firm's dividend policy impacts its value. Walter's and Gordon's models show how value is determined based on factors like earnings, dividends, growth rates, and costs of capital.
2. Dividend irrelevance theories, proposed by Modigliani and Miller, state that a firm's value depends only on its investment policy, not its dividend policy.
3. The bird-in-hand theory suggests that even in situations of equal growth rates and costs of capital, investors prefer dividends in-hand to future capital gains due to uncertainty.
The document discusses dividend policy and its various aspects. It defines dividend and explains the relevance and irrelevance concepts of dividend. It describes different approaches to dividend policy including the residual approach, MM model, Walter's approach and Gordon's approach. It also discusses determinants of dividend policy, types of dividend policies and forms of dividend including cash, stock and property dividends. The legal aspects of dividend payment are also summarized.
The document discusses capital structure and the Modigliani-Miller approach. It provides definitions of capital structure and optimal capital structure. It then outlines the key assumptions of the Modigliani-Miller approach, including perfect capital markets, no taxes, 100% dividend payout, and constant business risk. The document explains the Modigliani-Miller propositions that the market value and cost of capital of a firm are independent of its capital structure. It provides an example to demonstrate how arbitrage would eliminate any differences in market values between levered and unlevered firms.
This document discusses dividend policy and the various theories around it. It defines dividends and discusses Walter's model and Gordon's model, which propose that dividend policy affects firm value. It also covers the irrelevance theories of Modigliani-Miller and the traditional approach, which argue that dividend policy does not impact value. The document provides formulas for the different models and discusses their assumptions and criticisms.
capital structure
,
goals and significance of capital structure
,
target capital structure
,
does capital structure matter
,
modigliani and miller theory
This document discusses dividend policy. It begins by defining dividends as the portion of a firm's profits distributed to shareholders. It then discusses factors that affect dividend policy, including earnings stability, financing needs, liquidity, competitive practices, past dividends, debt obligations, growth needs, and legal requirements. It also outlines different types of dividends such as cash, stock, bond, and property dividends. The document concludes by briefly introducing three dividend theories: Walter's model, Gordon's model, and Modigliani and Miller's hypothesis.
The document discusses various methods for valuing different types of securities. It covers the valuation of debentures, preference shares, and equity shares. For debentures and preference shares, the valuation models discount future interest and principal cash flows to arrive at a present value. For equity shares, the dividend capitalization approach discounts expected future dividends, while the earnings capitalization approach discounts future earnings. Growth must be considered for shares but not for debentures or preference shares that offer fixed cash flows.
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)
The document discusses dividend policy and its theories of relevance and irrelevance. It states that dividend policy refers to a board's decision on distributing residual earnings to shareholders. There are two choices - pay dividends or reinvest funds. The theories of irrelevance suggest dividend policy does not impact stock price or cost of capital, while relevance theories like Walter's model and Gordon's model suggest dividends are relevant. Gordon's model shows the value of a stock is equal to the present value of future perpetual dividend growth at a constant rate.
The document discusses break-even analysis, which determines the sales volume needed for a company to cover its total costs. It defines break-even point as the sales level where total revenue equals total costs, resulting in no profit or loss. The document provides examples of calculating break-even point using tables and charts. It also outlines the assumptions and limitations of break-even analysis, and explains its uses for management decision making like determining a target profit level or the effect of a price change.
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
This document discusses capital structure and the factors considered when determining a firm's optimal capital structure. It discusses several approaches to determining the optimal capital structure, including:
1. The net income approach, which argues that changing capital structure affects overall cost of capital and firm value.
2. The net operating income/Modigliani-Miller approach, which argues that changing capital structure does not affect overall cost of capital or firm value.
3. The traditional/intermediate approach, which argues that increasing debt initially decreases overall cost of capital up to an optimal point, after which further increasing debt increases overall cost of capital.
The document analyzes the assumptions and implications of each approach. It also lists factors
The document discusses various bond valuation concepts like coupon rate, current yield, spot interest rate, yield to maturity, yield to call, and realized yield. It provides examples to calculate these measures and explains how bond prices are determined based on factors like interest rates, time to maturity, and cash flows. Bond duration is introduced as a measure of interest rate risk exposure, and bond risks from default and changes in interest rates are explained.
This document discusses the cost of capital. It defines cost of capital as the minimum rate of return that a firm must earn on its investments to maintain its value. Cost of capital has several components, including the return at zero risk, and premiums for business risk and financial risk. The document also discusses the different types of capital like debt, equity and retained earnings, and how to compute the cost of each. It explains weighted average cost of capital is calculated by weighting the costs of different sources of capital by their proportions.
Investment is the deployment of funds with the goal of generating income or capital gains in the future. There are several types of investment including financial investment in securities, real investment in capital goods, autonomous investment that remains constant, and induced investment that changes with income levels. The marginal efficiency of capital determines the expected return on investment projects and is influenced by interest rates - lower rates make investment more attractive by reducing borrowing costs. Factors that can shift the marginal efficiency of capital schedule include changes in demand, costs, technology, business confidence, and the supply of finance.
The document discusses dividend policies and theories. It defines dividends and describes different types of dividends. It then explains relevance theories including Walter's model and Gordon's model that consider dividends relevant to firm value. Irrelevance theories like Modigliani-Miller's model are also summarized. The document analyzes Aditya Birla Nuvo's dividend policy, noting it declared a 50% equity dividend of Rs. 5 per share for the year ending March 2016.
This document defines and describes various types of security and non-security marketable and non-marketable financial assets. It discusses equity shares, preference shares, bonds, debentures, convertible securities, hybrid securities, derivatives, and various money market instruments. It also covers non-security assets such as fixed deposits, gilt-edged securities, and post office savings schemes.
This chapter discusses capital budgeting techniques used to evaluate long-term investment projects. It covers the payback period method, which calculates the number of years to recover the initial investment of a project from its cash inflows. The chapter provides examples of calculating payback periods for projects and discusses the pros and cons of the payback method, noting it does not take the time value of money into account but is intuitive. It also introduces net present value and internal rate of return techniques.
This document summarizes key aspects of managing receivables, including:
1) Defining receivables as unpaid amounts from credit sales and outlining objectives like collecting accounts receivable.
2) Explaining reasons companies offer credit like promoting sales and factors affecting credit policies like collection costs.
3) Describing steps in determining credit policies including evaluating customers' character, capital, and repayment ability.
4) Outlining collection policies for overdue accounts involving escalating efforts like phone calls, visits, and legal action if needed.
The document discusses dividend policy and its various aspects. It defines dividend and explains the relevance and irrelevance concepts of dividend. It describes different approaches to dividend policy including the residual approach, MM model, Walter's approach and Gordon's approach. It also discusses determinants of dividend policy, types of dividend policies and forms of dividend including cash, stock and property dividends. The legal aspects of dividend payment are also summarized.
The document discusses capital structure and the Modigliani-Miller approach. It provides definitions of capital structure and optimal capital structure. It then outlines the key assumptions of the Modigliani-Miller approach, including perfect capital markets, no taxes, 100% dividend payout, and constant business risk. The document explains the Modigliani-Miller propositions that the market value and cost of capital of a firm are independent of its capital structure. It provides an example to demonstrate how arbitrage would eliminate any differences in market values between levered and unlevered firms.
This document discusses dividend policy and the various theories around it. It defines dividends and discusses Walter's model and Gordon's model, which propose that dividend policy affects firm value. It also covers the irrelevance theories of Modigliani-Miller and the traditional approach, which argue that dividend policy does not impact value. The document provides formulas for the different models and discusses their assumptions and criticisms.
capital structure
,
goals and significance of capital structure
,
target capital structure
,
does capital structure matter
,
modigliani and miller theory
This document discusses dividend policy. It begins by defining dividends as the portion of a firm's profits distributed to shareholders. It then discusses factors that affect dividend policy, including earnings stability, financing needs, liquidity, competitive practices, past dividends, debt obligations, growth needs, and legal requirements. It also outlines different types of dividends such as cash, stock, bond, and property dividends. The document concludes by briefly introducing three dividend theories: Walter's model, Gordon's model, and Modigliani and Miller's hypothesis.
The document discusses various methods for valuing different types of securities. It covers the valuation of debentures, preference shares, and equity shares. For debentures and preference shares, the valuation models discount future interest and principal cash flows to arrive at a present value. For equity shares, the dividend capitalization approach discounts expected future dividends, while the earnings capitalization approach discounts future earnings. Growth must be considered for shares but not for debentures or preference shares that offer fixed cash flows.
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)
The document discusses dividend policy and its theories of relevance and irrelevance. It states that dividend policy refers to a board's decision on distributing residual earnings to shareholders. There are two choices - pay dividends or reinvest funds. The theories of irrelevance suggest dividend policy does not impact stock price or cost of capital, while relevance theories like Walter's model and Gordon's model suggest dividends are relevant. Gordon's model shows the value of a stock is equal to the present value of future perpetual dividend growth at a constant rate.
The document discusses break-even analysis, which determines the sales volume needed for a company to cover its total costs. It defines break-even point as the sales level where total revenue equals total costs, resulting in no profit or loss. The document provides examples of calculating break-even point using tables and charts. It also outlines the assumptions and limitations of break-even analysis, and explains its uses for management decision making like determining a target profit level or the effect of a price change.
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
This document discusses capital structure and the factors considered when determining a firm's optimal capital structure. It discusses several approaches to determining the optimal capital structure, including:
1. The net income approach, which argues that changing capital structure affects overall cost of capital and firm value.
2. The net operating income/Modigliani-Miller approach, which argues that changing capital structure does not affect overall cost of capital or firm value.
3. The traditional/intermediate approach, which argues that increasing debt initially decreases overall cost of capital up to an optimal point, after which further increasing debt increases overall cost of capital.
The document analyzes the assumptions and implications of each approach. It also lists factors
The document discusses various bond valuation concepts like coupon rate, current yield, spot interest rate, yield to maturity, yield to call, and realized yield. It provides examples to calculate these measures and explains how bond prices are determined based on factors like interest rates, time to maturity, and cash flows. Bond duration is introduced as a measure of interest rate risk exposure, and bond risks from default and changes in interest rates are explained.
This document discusses the cost of capital. It defines cost of capital as the minimum rate of return that a firm must earn on its investments to maintain its value. Cost of capital has several components, including the return at zero risk, and premiums for business risk and financial risk. The document also discusses the different types of capital like debt, equity and retained earnings, and how to compute the cost of each. It explains weighted average cost of capital is calculated by weighting the costs of different sources of capital by their proportions.
Investment is the deployment of funds with the goal of generating income or capital gains in the future. There are several types of investment including financial investment in securities, real investment in capital goods, autonomous investment that remains constant, and induced investment that changes with income levels. The marginal efficiency of capital determines the expected return on investment projects and is influenced by interest rates - lower rates make investment more attractive by reducing borrowing costs. Factors that can shift the marginal efficiency of capital schedule include changes in demand, costs, technology, business confidence, and the supply of finance.
The document discusses dividend policies and theories. It defines dividends and describes different types of dividends. It then explains relevance theories including Walter's model and Gordon's model that consider dividends relevant to firm value. Irrelevance theories like Modigliani-Miller's model are also summarized. The document analyzes Aditya Birla Nuvo's dividend policy, noting it declared a 50% equity dividend of Rs. 5 per share for the year ending March 2016.
This document defines and describes various types of security and non-security marketable and non-marketable financial assets. It discusses equity shares, preference shares, bonds, debentures, convertible securities, hybrid securities, derivatives, and various money market instruments. It also covers non-security assets such as fixed deposits, gilt-edged securities, and post office savings schemes.
This chapter discusses capital budgeting techniques used to evaluate long-term investment projects. It covers the payback period method, which calculates the number of years to recover the initial investment of a project from its cash inflows. The chapter provides examples of calculating payback periods for projects and discusses the pros and cons of the payback method, noting it does not take the time value of money into account but is intuitive. It also introduces net present value and internal rate of return techniques.
This document summarizes key aspects of managing receivables, including:
1) Defining receivables as unpaid amounts from credit sales and outlining objectives like collecting accounts receivable.
2) Explaining reasons companies offer credit like promoting sales and factors affecting credit policies like collection costs.
3) Describing steps in determining credit policies including evaluating customers' character, capital, and repayment ability.
4) Outlining collection policies for overdue accounts involving escalating efforts like phone calls, visits, and legal action if needed.
The document discusses various aspects of credit management and receivables management. It covers topics like determining credit policy, credit evaluation techniques, financing receivables, and controlling receivables. Credit policy involves balancing sales growth with costs of bad debts and investment in receivables. Methods for credit evaluation include traditional analysis of five C's (character, capacity, capital, collateral, conditions), numerical credit scoring, and risk classification. Receivables are monitored using days' sales outstanding, ageing schedules, and collection matrices.
The document discusses various topics related to bond valuation including:
1) It defines key bond terminology such as par value, coupon rate, yield to maturity, and duration.
2) It explains how bond prices are affected by changes in market interest rates and how the yield to maturity is calculated.
3) It describes the different types of risks that bondholders face, such as interest rate risk, reinvestment risk, and default risk.
The document discusses business forecasting and provides guidance on creating financial forecasts. It explains that forecasts should include balance sheets, profit and loss statements, and cash flow statements. It also emphasizes developing a believable story about future company performance based on strategic perspectives like Porter's five forces model, SWOT analysis, and competitive business systems. The document provides tips for forecasting revenues, expenses, balance sheets, and cash flows in a consistent and detailed manner.
1. The document discusses various techniques for managing receivables, including determining appropriate credit standards, analyzing creditworthiness, setting credit terms and collection policies.
2. Key aspects of receivables management include balancing the costs and benefits of maintaining receivables, assessing factors like a customer's capital, character, collateral, capacity and economic conditions.
3. Techniques for analyzing receivables policies involve marginal analysis to accept changes where marginal returns exceed costs, and heuristic or discriminant analysis using factors from a company's experience to establish credit limits.
Investment appraisal is a means of assessing whether an investment project is worthwhile. It involves analyzing factors such as payback period, accounting rate of return, internal rate of return, profitability index, and net present value. Net present value discounts future cash flows to account for the time value of money and allows comparison of investments. Firms use these techniques to evaluate potential investments and determine which projects to pursue.
The document provides a formula to calculate the market price (VB) of a bond based on its coupon payment (CP), yield to maturity (i), number of periods until maturity (n), and par/face value (PV). It then works through an example calculation for a $1,000 face value bond with a 7% annual coupon, 5.85% yield to maturity, and 9 years to maturity, determining the market price is $1,078.74.
This document discusses receivables management. It begins by defining receivables as sales made on credit that represent amounts owed to a firm from customers. Effective receivables management involves establishing credit policies, evaluating customer creditworthiness, and controlling receivables. The objectives are to maximize return on investment in receivables while allowing sufficient sales growth. Key aspects covered include granting credit, costs of receivables management, collection methods, and analysis of receivables aging and customer importance.
The document discusses cash management. It defines cash and describes cash management as managing cash flows in and out of a firm, within a firm, and cash balances. There are four facets of cash management: cash planning, managing cash flows, optimal cash level, and investing surplus cash. Firms hold cash for transaction, precautionary, speculative, and compensating motives. The objectives of cash management are to meet payment schedules and minimize idle cash. Methods to manage cash include accelerating collections and controlling disbursements. The Baumol and Miller-Orr models provide frameworks for determining optimal cash levels.
The document discusses different types of bonds such as government bonds, municipal bonds, mortgage-backed securities, asset-backed securities, corporate bonds, and zero-coupon bonds. It provides details on the key features of bonds including their nominal value, issue price, maturity date, coupon rate and payment dates. It also outlines some of the main risks associated with investing in bonds such as interest rate risk, reinvestment risk, inflation risk, market risk, default risk, and call risk.
The document discusses the chi-square test, which offers an alternative method for testing the significance of differences between two proportions. It was developed by Karl Pearson and follows a specific chi-square distribution. To calculate chi-square, contingency tables are made noting observed and expected frequencies, and the chi-square value is calculated using the formula. Degrees of freedom are also calculated. Chi-square test is commonly used to test proportions, associations between events, and goodness of fit to a theory. However, it has limitations when expected values are less than 5 and does not measure strength of association or indicate causation.
The document discusses capital structure and leverage. It defines capital structure and discusses questions to consider when making financing decisions, such as determining the optimal financing mix. Appropriate capital structures should have features like profitability, solvency, flexibility, capacity, and control. Capital structure is determined by factors like taxes, flexibility, industry norms, and investor requirements. Firms can use different forms of capital structure involving various proportions of equity, debt, and preference shares. Financial leverage refers to using debt financing to magnify returns, and it can be measured using ratios like debt ratio and interest coverage. Capital structure theories address whether firm value depends on capital structure.
Business forecasting uses qualitative and quantitative methods to predict future business conditions and trends. Qualitative methods gather opinions through surveys and focus groups, while quantitative analyzes statistical data to identify trends. Some alternative methods like astrology are unlikely to be more effective than traditional qualitative and quantitative approaches. Forecasting provides benefits like informed decision-making but also costs as data may be unreliable, outdated, or unable to account for unexpected external changes.
This document provides an overview of time series analysis and its key components. It discusses that a time series is a set of data measured at successive times joined together by time order. The main components of a time series are trends, seasonal variations, cyclical variations, and irregular variations. Time series analysis is important for business forecasting, understanding past behavior, and facilitating comparison. There are two main mathematical models used - the additive model which assumes data is the sum of its components, and the multiplicative model which assumes data is the product of its components. Decomposition of a time series involves discovering, measuring, and isolating these different components.
This document defines and describes various types of financial institutions. It discusses banks, central banks, commercial banks, investment banks, savings banks, microfinance banks, Islamic banks, specialized banks, non-banking financial companies, investment companies, leasing companies, insurance companies, mutual funds, and brokerage houses. It also covers the functions of financial institutions in transferring funds from investors to companies and facilitating cash flow in the economy.
The document discusses the concept of time value of money, which is the principle that money received today is worth more than the same amount in the future due to its potential to earn interest. It defines key terms like present value and future value and provides formulas to calculate them. An example calculation demonstrates that receiving $10,000 today is preferable to receiving the same amount in 3 years, since the present value of $10,000 in 3 years at a 10% interest rate is $7,513.10. Understanding time value of money is important for financial decision making regarding investments, loans, savings, and more.
The study analyzed the impact of working capital management on the profitability of 58 small manufacturing firms in Mauritius over the period of 1998-2003. The results showed that return on total assets, a measure of profitability, was positively correlated with measures of working capital management efficiency like accounts receivable days and cash conversion cycle. However, it was negatively correlated with accounts payable days. The paper concluded that synchronizing current assets and liabilities is important for small firm profitability and the paper industry showed best practices in working capital management.
The document discusses various aspects of financial management including its definition, scope, traditional and modern approaches, functions, objectives, and sources of finance. Specifically, it defines financial management as dealing with planning and controlling a firm's financial resources. It also discusses the functions of investment, financing, and dividend decisions and how financial management aims to maximize profit and shareholder wealth.
Kuldeep Uttam provides an overview of inventory management concepts in 3 pages. He defines inventory as physical resources held for sale or transformation. The purpose of inventory management is to determine order quantities and timing. Inventories include raw materials, work-in-progress, finished goods, and supplies. Inventory management aims to balance holding versus ordering costs. Methods include economic order quantity models, reorder points, and ABC classification to prioritize inventory items. The document provides definitions and examples of key inventory management terms and techniques.
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.
The document discusses dividend policy and its relationship to a firm's market value. It defines dividend policy as a board's decision on distributing residual earnings to shareholders. Different types of dividends are covered, including cash, stock, and liquidating dividends. The mechanics of declaring and paying cash dividends are explained. Modigliani and Miller's dividend irrelevance theorem and its assumptions are summarized, along with arguments for why dividends may matter in the real world due to factors like taxes, risk, and investor preferences.
This document discusses various aspects of corporate dividend policies, including theories on dividend relevance and irrelevance, factors that influence dividend policies, types of dividends such as stock dividends and stock splits, and methods of stock repurchase. It covers Modigliani-Miller's argument that dividends are irrelevant, counterarguments that dividends do matter due to taxes and signaling, and factors corporations consider in determining their dividend policies such as funding needs, liquidity, and debt restrictions.
FINANCIAL MANAGEMENT PPT BY FINMANDividend policy joseph agayatin&jezza deaunaMary Rose Habagat
This document discusses dividend policy and various types of dividends. It defines dividends as distributions to shareholders proportionate to share ownership. There are various types of dividends including cash, stock, and property dividends. The document outlines relevant dates for dividends including declaration, record, and payment dates. It also discusses the accounting entries related to dividends. Additionally, it covers dividend reinvestment plans, factors in determining dividend policy, and different approaches to dividend policy including constant payout ratio and regular dividend policies.
Dividend policy refers to a company's decision to pay dividends to shareholders from current or retained earnings. While dividend policy may not matter according to theory, in practice it signals management's outlook and can attract different types of investors. Companies consider factors like growth opportunities, financial flexibility, and tax implications when determining their dividend policy.
This document discusses dividend decisions and various dividend theories. It begins by defining dividends and explaining their significance for shareholders and companies. It then discusses different dividend theories, including Walter's model, Gordon's model, and the Modigliani-Miller irrelevance theory. Walter's model proposes that the optimal dividend payout depends on a company's growth rate and cost of capital. Gordon's model expresses stock price as a function of dividends, retention rate, and growth rate. The Modigliani-Miller theory argues that dividend policy does not affect firm value under certain assumptions. The document also provides a summary of Reliance Industries' dividend announcements and payments over five years.
This document discusses various valuation market ratios used to evaluate companies, including earnings per share (EPS), dividend per share (DPS), dividend payout ratio, dividend yield, price to earnings (P/E) ratio, and market to book value ratio. It provides the formulas and explanations for how to calculate and interpret each ratio. Key points include that dividends are reported on the statement of cash flows and statement of changes in stockholders' equity, and that ratios should only be used to compare companies within the same industry due to differences in business models and growth rates across sectors.
This document provides an overview of dividend policy presented by Team 'CURSORS of BUSINESS'. It defines dividend as a distribution of a company's earnings to shareholders, and dividend policy as guidelines used to decide how much earnings to pay out. The objectives of dividend policy include wealth maximization, maintaining funds for future prospects, providing a stable dividend rate, and maintaining control. Factors affecting policy include legal requirements, liquidity, repayment needs, expected returns, and stability of earnings. Forms of dividends include cash and stock dividends. The document also discusses stability of dividends, forms of stability, bonus shares, share splits, and share buybacks.
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
Dividends are payments made by a corporation to its shareholders, usually from current or past profits. There are different types of dividends including cash dividends, stock dividends, and special dividends. Companies establish dividend policies that determine how much of profits to pay out as dividends versus retaining for reinvestment. Common dividend policies include stable dividend policies that aim to maintain consistent dividend payouts over time.
The document discusses the advantages and disadvantages of four different dividend policies for Warner Body Works: 1) Continuing the current 60% payout ratio, 2) Lowering the payout ratio below 60%, 3) Establishing a fixed dollar dividend that increases with earnings, and 4) Low payout supplemented by extra dividends. It also addresses how Warner Body Works' debt level and the changes in tax laws could impact its optimal dividend payout ratio. The assistant recommends a residual dividend policy for Warner Body Works given its growth opportunities, or otherwise a liberal policy, and issues cautions about debt and ignoring investor preferences when setting capital structure and budgeting decisions.
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The document discusses dividends, which are payments made by a corporation to its shareholders from current or retained earnings. Dividends are allocated proportionally based on shareholding. While dividends are not an expense for joint stock companies, they reduce retained earnings. Companies usually pay dividends on a fixed schedule but may declare special dividends. Dividends are paid in cash, credits, or additional shares. Firms must carefully consider their circumstances and environment when determining their dividend policy.
Dividend policy refers to a company's decision on how much of its earnings to distribute to shareholders as dividends versus retaining for reinvestment. There are several theories on dividend policy, including the dividend irrelevance theory, which argues dividend policy does not impact share price, and the bird-in-hand theory, that shareholders prefer dividends to uncertain future capital gains. A company must consider constraints, investment opportunities, alternative capital sources, and the impact on its cost of capital when determining its dividend policy. Common dividend policies include stable, residual, stock splits, and stock dividends.
The document discusses dividend policy and its implications. It covers several key points:
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Business Mathematics is a course that teaches mathematical concepts and techniques used in business. It covers topics such as financial calculations, statistics, probability, and modeling to solve business problems. The goal is to provide students with the quantitative skills needed to analyze business situations and make informed financial decisions.
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The document discusses several theories of capital structure:
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2) Net operating income approach finds no optimal structure as equity rates adjust to keep overall rates constant.
3) Traditional approach finds an optimal structure where costs initially fall then rise with more debt.
4) MM theory initially argues capital structure is irrelevant without taxes but debt provides tax shields with taxes.
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The document presents a case study on implementing Overall Equipment Effectiveness (OEE) on a CNC table type boring and milling machine at a heavy machinery manufacturing industry. Initial OEE calculations found the machine's OEE to be 62%, below the world-class level of 85%. Suggestions were made to reduce changeover, break, and downtime, which improved the OEE to 75%. Further improvements could bring the OEE closer to the target world-class level.
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
[4:55 p.m.] Bryan Oates
OJPs are becoming a critical resource for policy-makers and researchers who study the labour market. LMIC continues to work with Vicinity Jobs’ data on OJPs, which can be explored in our Canadian Job Trends Dashboard. Valuable insights have been gained through our analysis of OJP data, including LMIC research lead
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Solution Manual For Financial Accounting, 8th Canadian Edition 2024, by Libby...Donc Test
Solution Manual For Financial Accounting, 8th Canadian Edition 2024, by Libby, Hodge, Verified Chapters 1 - 13, Complete Newest Version Solution Manual For Financial Accounting, 8th Canadian Edition by Libby, Hodge, Verified Chapters 1 - 13, Complete Newest Version Solution Manual For Financial Accounting 8th Canadian Edition Pdf Chapters Download Stuvia Solution Manual For Financial Accounting 8th Canadian Edition Ebook Download Stuvia Solution Manual For Financial Accounting 8th Canadian Edition Pdf Solution Manual For Financial Accounting 8th Canadian Edition Pdf Download Stuvia Financial Accounting 8th Canadian Edition Pdf Chapters Download Stuvia Financial Accounting 8th Canadian Edition Ebook Download Stuvia Financial Accounting 8th Canadian Edition Pdf Financial Accounting 8th Canadian Edition Pdf Download Stuvia
OJP data from firms like Vicinity Jobs have emerged as a complement to traditional sources of labour demand data, such as the Job Vacancy and Wages Survey (JVWS). Ibrahim Abuallail, PhD Candidate, University of Ottawa, presented research relating to bias in OJPs and a proposed approach to effectively adjust OJP data to complement existing official data (such as from the JVWS) and improve the measurement of labour demand.
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Do elements of globalization, such as Foreign Direct Investment (FDI), negatively affect the ability of countries in the Global South to preserve their culture? This research aims to answer this question by employing a cross-sectional comparative case study analysis utilizing methods of difference. Thailand and Cambodia are compared as they are in the same region and have a similar culture. The metric of difference between Thailand and Cambodia is their ability to preserve their culture. This ability is operationalized by their respective attitudes towards FDI; Thailand imposes stringent regulations and limitations on FDI while Cambodia does not hesitate to accept most FDI and imposes fewer limitations. The evidence from this study suggests that FDI from globally influential countries with high gross domestic products (GDPs) (e.g. China, U.S.) challenges the ability of countries with lower GDPs (e.g. Cambodia) to protect their culture. Furthermore, the ability, or lack thereof, of the receiving countries to protect their culture is amplified by the existence and implementation of restrictive FDI policies imposed by their governments.
My study abroad in Bali, Indonesia, inspired this research topic as I noticed how globalization is changing the culture of its people. I learned their language and way of life which helped me understand the beauty and importance of cultural preservation. I believe we could all benefit from learning new perspectives as they could help us ideate solutions to contemporary issues and empathize with others.
2. – 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
3. Factors determining dividend policy of
a firm
1. Dividend Payout (D/P) Ratio
2. Stability of Dividends
3. Legal, contractual & internal restrictions
4. Owners’ considerations
5. Clientele effect
6. Capital market considerations
7. Inflation
4. Dividend Payout (D/P) Ratio
1. D/P Ratio indicates the percentage earnings distributed
to shareholders in cash, calculated dividing the cash
dividend per share by its earnings per share
2. Optimum dividend policy should strike a balance
between current dividends & future growth which
maximizes price of firm’s share
3. In practice, investors in general have a clear-cut
preference for dividends because of uncertainty &
imperfect capital markets.
4. Thus a low D/P ratio may cause a decline in share
prices, while a high ratio may lead to rise in the
market price of the shares.
5. Stability of Dividends
• Refers to the payment of a certain minimum amount of
dividend regularly
1. Constant dividend per share policy: it is a policy of
paying a certain fixed amount per share as dividend
2. Constant /target payout ratio: it is a policy to pay a
constant % of net earnings as dividend to shareholders
in each dividend period
3. Stable rupee plus extra dividend: it is a policy based
on paying a fixed dividend to shareholders
supplemented by an additional dividend when
earnings warrant it
6. Legal, contractual & internal restrictions
• Legal stipulations do not require a dividend
declaration but they specify the conditions under
which dividends must be paid –
• (i) capital impairment: firm can not pay dividends out of its paid-up capital,
adversely affecting the security of its lenders
• (ii) net profits: firm can not pay cash dividends greater than the amount of
current profits plus the accumulated retained earnings
• (iii) insolvency: firm would not pay dividend if it leads to insolvency
• The contractual restrictions on payment of dividends
are imposed by loan agreements
• The internal constraints impinging on the dividend
restrictions relate to growth prospects, availability of
funds, earning stability, and control
7. Remaining Factors
• Owners’ considerations: The dividend policy is also likely
to be affected by the owners’ consideration of (a) tax status
of the shareholders,(b) their opportunities for investment
and (c) dilution of ownership
• Capital market considerations: While a firm which has easy
access to the capital market can follow a liberal dividend
policy, a firm having only limited access to the capital
markets is likely to adopt low dividend payout ratio as they
are likely to rely, to a greater extent, on retained earnings as
a source of financing their investments.
• Inflation: With rising prices, funds generated from
depreciation may be inadequate to replace obsolete
equipments. As a result, the D/P ratio tends to be low
during periods of inflation.
8. 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.
9. Dividend Payments
Stock Dividends / Bonus Shares
• 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.
10. Dividend Payments
Stock Dividends /Bonus Shares
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
11. CHAPTER 22 – Dividend Policy 22 - 11
Dividend Payments
Stock Dividend / Bonus Shares 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:
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12. CHAPTER 22 – Dividend Policy 22 - 12
Dividend Payments
Stock Dividend /Bonus Shares 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.
13. CHAPTER 22 – Dividend Policy 22 - 13
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)
14. CHAPTER 22 – Dividend Policy 22 - 14
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
15. CHAPTER 22 – Dividend Policy 22 - 15
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.
16. CHAPTER 22 – Dividend Policy 22 - 16
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.
17. CHAPTER 22 – Dividend Policy 22 - 17
- 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
18. CHAPTER 22 – Dividend Policy 22 - 18
• allowed under the amended Companies Act,
1999
• reasons for use:
– Offsetting the exercise of executive stock options
– Leveraged recapitalizations
– Information or signalling effects
– Repurchase dissident shares
– Removing cash without generating expectations for future
distributions
– Take the firm private.
Share Repurchases /Buyback
19. CHAPTER 22 – Dividend Policy 22 - 19
• they are usually done on an irregular basis, so a shareholder cannot
depend on income from this source.
• if regular repurchases are made, there is a good chance that statutory
authorities will rule that the repurchases were simply a tax avoidance
scheme (to avoid tax on dividends) and will assess tax
• there may be some agency problems - if managers have inside
information, they are purchasing from shareholders at a price less than
the intrinsic value of the shares.
Disadvantages of Share Repurchases
20. CHAPTER 22 – Dividend Policy 22 - 20
• tender offer:
– this is a formal offer to purchase a given number of shares at a given
price over current market price at a given time.
• open market purchase:
– the purchase of shares through an investment dealer like any other
investor
– this is not designed for large block purchases.
• private negotiation with major shareholders
In any repurchase program, the securities commission/ SEBI requires
disclosure of the event as well as all other material information
through a prospectus.
Methods of Share Repurchases
21. CHAPTER 22 – Dividend Policy 22 - 21
• EPS should increase following the repurchase
if earnings after-tax remains the same
• a higher market price per outstanding share of
common stock should result
• stockholders not selling their shares back to
the firm will enjoy a capital gain if the
repurchase increases the stock price.
Effects of A Share Repurchase
22. CHAPTER 22 – Dividend Policy 22 - 22
• signal positive information about the firm’s future cash flows
• used to effect a large-scale change in the firm’s capital structure
• increase investor’s return without creating an expectation of higher
future cash dividends
• reduce future cash dividend requirements or increase cash dividends
per share on the remaining shares, without creating a continuing
incremental cash drain
• capital gains treated more favourably than cash dividends for tax
purposes.
Advantages of Share Repurchases
23. CHAPTER 22 – Dividend Policy 22 - 23
• signal negative information about the firm’s
future growth and investment opportunities
• the provincial securities commission may raise
questions about the intention
• share repurchase may not qualify the investor
for a capital gain
Disadvantages of Share Repurchases
24. Dividend Policy
• If the company is confident of generating more than
market returns then only it should retain higher profits
and pay less as dividends (or pay no dividends at all),
as the shareholders can expect higher share prices based
on higher ROI of the company.
• However, if the company is not confident of generating
more than market returns, it should pay out more
dividends (or 100% dividends).
• This is done for two reasons:
1. the shareholders prefer early receipt of cash (liquidity
preference theory) and
2. the shareholders can invest this cash to generate more
returns (since market returns are expected to be higher
than returns generated by the company).
25. Issues in Dividend Policy
• The subject matter of the dividend policy is whether
pay-out ratio has any impact on the market price of the
share or not.
• In other words, if we change the pay-out ratio, whether
market price of the share will change (if yes, in which
direction) or not.
• Earnings to be Distributed – High Vs. Low Payout.
• Objective – Maximize Shareholders Return.
• Effects – Taxes, Investment and Financing Decision.
26. Relevance Vs. Irrelevance
• Walter's Model
• Gordon's Model
• Modigliani and Miller Hypothesis
• The Bird in the Hand Argument
• Informational Content
• Market Imperfections
27. DIVIDEND RELEVANCE:
WALTER’S MODEL
James E. Walter Walter’s model is based on the following
assumptions:
• Internal financing (only source of financing is through retained
earnings)
• Constant return and cost of capital
• 100 per cent payout or retention
• Constant EPS and DIV
• Infinite time
• The model considers internal rate of return (IRR), market
Capitalization rate, and dividend payout ratio in determination of
share prices.
• However, it fails to appropriately calculate prices of companies
that resort to external sources of finance.
• Further, the assumption of constant cost of capital and constant
return are unrealistic.
29. Optimum Payout Ratio
• Growth Firms – Retain all earnings ( if the rate of
return that the company may earn on retained
earnings, is higher than cost of equity (the
expected returns of the shareholders) then, it
would be in the interest of the firm to retain the
earnings)
• Normal Firms – Distribute all earnings (If the
company’s reinvestment rate on retained earnings
is the less than share-holders’ rate of return, the
company should not retain earnings)
• Declining Firms – No effect (If the two rates are
the same, then the company should be indifferent
between retaining and distributing)