What is Dividend ? What is Dividend Decision ? Factors affecting Dividend Decision. Concepts of Dividend Decision. The Irrelevance Concept. The Relevance Concept. References.

1. DIVIDEND DECISION
MADE BY: AKSHAT ABHISHEK
MIHIR PAREEK
RAJAT SHIVHARE
TUSHAR SHARMA

2. Content:
What is Dividend ?
What is Dividend Decision ?
Factors affecting Dividend Decision.
Concepts of Dividend Decision.
The Irrelevance Concept.
The Relevance Concept.
References.

3. What is Dividend ?
Dividend refers to a reward, cash or otherwise,
that a company gives to its
shareholders. Dividends can be issued in various
forms, such as cash payment, stocks or any other
form. A company's dividend is decided by its
board of directors and it requires the
shareholders' approval.

4. What is Dividend Decision ?
Dividend decision refers
to the policy that the
management
formulates in regard to
earnings for distribution
as dividends among
shareholders.
It is a decision made by
the directors of a
company about the
amount and timing of
any cash payments
made to the company's
stockholders.

5. Factors affecting Dividend Decision:
Legal Provisions: As per Indian Companies Act, 1956 a
company is required to transfer a certain percentage of
profits to reserves in case the dividend to be paid is more
than 10 percent.
Desire of Shareholders: The shareholders, who are
economically weak, prefer regular dividend policy while
the rich shareholders may prefer capital gains as
compared to dividends.

6. Nature of Industry: Industries with stable demand throughout
the year are in a position to have stable earnings, thus, should
have the stable dividend policy and vice-versa.
Age of the Company: A company’s age also determine the
quantum of profits to be declared as dividends.
Taxation Policy: The rate of tax directly influences the amount
of profits available to the company for declaring dividends.
Control Factor: Yet another factor determining dividend policy
is the threat to loose control.

7. Liquidity Position: If a company does not have sufficient cash
resources to make dividend payment, then it may go for issue
of bonus shares.
Future Requirements: A company while framing dividend
policy should also consider its future plans.
Business Risk: Business risk is a potential factor that may
affect dividend policy.
Rate of return: It is one of the main factor that directly
affects the dividend decision, high rate of return means high
dividend to the shareholders.

8. Concepts of Dividend Decision:
Concept # 1. The Irrelevance Concept of
Dividend:
Concept # 2. The Relevance Concept of
Dividend:

9. Concept # 1. The Irrelevance Concept of Dividend:
In this we
have further
two theories:
Residual
Approach.
Modigliani
and Miller
Approach.

10. Residual Approach:
• According to this Dividend has no effect on
the wealth of shareholders.
• This theory regards dividend decision merely
as a part of financing decision.
• But if funds are not required they may be
distributed as dividend. Thus the decision to
pay dividend may be taken as residual
approach.
Assumptions :
 The Investor do not differentiate between
dividends and retention. Their basic desire is
to earn higher rate to return on investment.
 In case the firm has profitable investment
opportunities giving a higher rate of return
than the cost of retained earnings the
investors would be content with the firm
retaining the earning to finance the same.

11. Modigliani and Miller
approach:
• They maintain that dividend policy has no
effect on the market price of the shares and
the value of the firm is determined by the
earning capacity of the firm.
• According to M.M, Dividend policy may have
no influence on market price of the share.
Assumptions:
 There are perfect capital market.
 Investors behave rationally.
 Information of the company is known to all.
 There are no flotation and transaction cost.
 The firm has a rigid investment policy.
 No investor is large enough to effect the
market price of the share.

12. Concept # 2. The Relevance Concept of Dividend:
In this
we have
further
two
theories:
Walter’s approach.
Gordon’s approach.

13. Walter’s approach:
• Prof. Walter approach the doctrine
that dividend decisions are relevant
and affect the value of the firm.
• This model is based on the
relationship between the firm’s
1.) rate of return
2.) rate of investment
Assumptions:
 The internal rate of return and cost of
the capital are constant.
 Firm has a long life.
 Earnings and dividends do not change
while determining the value.

14. Gordon’s
Approach:
Myron Gordon has also
developed a model that
dividends are relevant and
dividend decision of the firm
affects its value.
 When r>k the price per
share increase as dividend
pay out ratio decreases and
vice-versa.
 When r<k the price per
share increase as dividend
pay out ratio increases and
vice-versa.
 When r=k the price per
share remains unchanged.
Assumptions:
 The firm is an all equity firm.
 Rate of return is constant.
 Retention ratio once decided
remains constant. Thus the
growth rate is also constant.
 Cost of capital is also
constant and is greater than
the growth rate.
 The firm has perpetual life.
 Corporate taxes do not exist.

15. References:
www.businessmanagementideas.com
www.managementstudyguide.com
www.managementnote.com
www.efinancemanagement.com

16. THANK YOU