The document outlines dividend decisions, including types of dividends such as cash, stock, property, scrip, liquidating, share splits, stock repurchase, and bonus shares. It explains dividend policy, which guides how much a company pays out to shareholders, categorized into regular, stable, irregular, and no dividend policies, while noting factors affecting these decisions such as profitability, liquidity, and legal constraints. Additionally, it provides insights into various models affecting dividend policy theories.

1. MODULE 5
DIVIDEND DECISIONS
SYLLABUS
Dividend Decisions: Dividend policy and factors affecting dividend policy –
dividend and its forms – relevance and irrelevance. An overview of theories
of dividend (Gordon Model, Walter Model, MM Model) - forms of dividend
– cash dividend, bonus shares, share split and stock repurchase.
Other Sources of Finance: Leasing, Hire Purchase and Venture capital
funding-emerging areas in finance-merger –acquisition-takeover – financial
engineering

2. DIVIDEND AND FORMS / TYPES OF DIVIDEND
DIVIDEND - Meaning
 Dividend is a portion of the company’s net earnings to be
distributed to its shareholders , based on board of director’s
decision.
 It may be also termed as the portion of the after tax profit of a
business concern which is distributed among its share holders .
 It is the reward paid to the shareholders for the investment
made by them .
 Dividends are quoted as Dividend Per Share(DPS) or dividend
yield.
 They are usually issued quarterly or annually.

3. TYPES OF DIVIDEND/FORMS OF DIVIDENT

4.  Cash Dividend
 The cash dividend is by far the most common of the dividend types used.
 On the date of declaration, the board of directors resolves to pay a certain
dividend amount in cash to those investors holding the company’s stock on
a specific date.
 The date of record is the date on which dividends are assigned to the holders
of the company’s stock. On the date of payment, the company issues
dividend payments.
 • If the dividend is paid in the form of cash to the shareholders, it is
called cash dividend.
 • It is paid periodically out the business concerns EAIT (Earnings after
interest and tax).
 • Cash dividends are common and popular types followed by majority
of the business concerns.

5.  Stock Dividend
 It is a dividend paid to the shareholders in the form of additional shares in
the company.
 A stock dividend is the issuance by a company of its common stock to its
common shareholders without any consideration.
 If the company issues less than 25 percent of the total number of previously
outstanding shares, then treat the transaction as a stock dividend.
 If the transaction is for a greater proportion of the previously outstanding
shares, then treat the transaction as a stock split.
 Stock dividend is paid in the form of the company stock due to raising
of more finance.
 • Under this type, cash is retained by the business concern.

6.  Property Dividend
 A company may issue a non-monetary dividend to investors, rather than
making a cash or stock payment.
 Record this distribution at the fair market value of the assets distributed.
Since the fair market value is likely to vary somewhat from the book value
of the assets, the company will likely record the variance as a gain or loss.
• Property dividends are paid in the form of some assets other than cash.
• It will be distributed under the exceptional circumstance.
• This type of dividend is not published in India.

7.  Scrip dividend
 Scrip dividend is also known as ‘Bond dividend ‘
 If the company does not have sufficient funds to pay cash dividend, the
company promises to pay the shareholder at a future specific date with the
help of issue of bond or notes or scrips.
 Bonds are issued promising to pay in a longer maturity period and bears
interest. While scrips are issued promising to pay in a shorter maturity
period.
 Liquidating dividend
 A liquidating dividend is a distribution of cash or other assets to
shareholders, with the intention of shutting down a business .
 This dividend is paid out after all creditor and lender obligations have been
settled, so the dividend payout should be one of the last actions taken before
the business is closed

8.  Share Split
 It is when a company divides the existing shares of its
stock into multiple new shares to boost the stock's
liquidity.
 The most common split ratios are 2-for-1 or 3-for-1,
which means that the stockholder will have two or three
shares, respectively, for every share held earlier.
 Basically, companies choose to split their shares so they
can lower the trading price of their stock to a range
deemed comfortable by most investors and increase the
liquidity of the shares.
 Most investors are more comfortable purchasing, say,
100 shares of Rs.10 stock as opposed to 10 shares of
Rs.100 stock. Thus, when a company's share price has
risen substantially, they go for share split.

9.  Stock Repurchase
 A share repurchase is a transaction whereby a company buys back its own
shares from the marketplace.
 The company buys shares directly from the market or offers its shareholders
the option of tendering their shares directly to the company at a fixed price.
 It is also known as “Share Buyback”.
 Bonus Shares
 Bonus shares are an additional number of shares given by the company to its
existing shareholders as “BONUS” when they are not in the position to pay a
dividend to its shareholders despite earning decent profits for that quarter.
 However, these bonus shares are given to the shareholders according to their
existing stake in the company.

10. DIVIDEND POLICY
 Dividend policy is the policy used by a company to decide how
much it will payout to shareholders in the form of dividends.
 When a company makes a profit, they need to make a decision
on what to do with it.
 They can either retain the profits in the company (retained
earnings on the balance sheet), or they can distribute the money to
share holders in the form of dividends.
 Usually a company retains a part of its earning's and distributes
the other part as dividend.

11. TYPES OF DIVIDEND POLICY
 Dividend policy depends upon the nature of the firm, type of shareholder
and profitable position.
 On the basis of the dividend declaration by the firm, the dividend policy
may be classified under the following types:
1) Regular dividend policy
2) Stable dividend policy
3) Irregular dividend policy
4) No dividend policy.

12. 1. Regular Dividend Policy
 When dividend payable at the usual rate is called as regular dividend policy.
 This type of policy is suitable to the small investors, widows, retired persons
and other economically weaker persons prefer to get regular dividends.
A regular dividend policy offers the following advantages
a. It establish a profitable record of the company
b. It creates confidence amongst the shareholders
c. It stabilizes the market value of shares.
d. The ordinary shareholders view dividend as a source of funds to meet their
day to day living expenses.
f. If profits are not distributed regularly and retained, the share holders may
have to pay a higher rate of tax in the year when accumulated profits are
distributed.

13. 2. Stable Dividend Policy
 Stable dividend policy means payment of certain minimum amount of
dividend regularly.
 There shall be a steady dividend payout every year irrespective of change
in income.
 Once the stable dividend policy is paid by the company, it is difficult to
change the same.
 If the company fails to pay stable dividend, then the financial standing of
the company in the minds of investors get damaged

14. 3. Irregular Dividend Policy
 When the companies are facing constraints of earnings and unsuccessful
business operation, they may follow irregular dividend policy.
 It is one of the temporary arrangements to meet the financial problems.
 Here, the company does not pay fixed dividend regularly rather it changes
yearly depending on the earnings.
4. No Dividend Policy
 Sometimes the company may follow no dividend policy because of its
unfavorable working capital position of the amount required for future
growth of the concerns.
 No dividends will be issued rather the profits shall be retained for business
growth.

15. FACTORS AFFECTING DIVIDEND POLICY

16.  Profitable Position of the Firm - Dividend decision depends on the
profitable position of the business concern. When the firm earns more
profit, they can distribute more dividends to the shareholders.
 Uncertainty of Future Income - Future income is a very important
factor, which affects the dividend policy. When the shareholder needs
regular income, the firm should maintain regular dividend policy.
 Legal Constrains - The Companies Act 2013 has put several
restrictions regarding payments and declaration of dividends. Similarly,
Income Tax Act, 1961 also lays down certain restrictions on payment of
dividends.
 Liquidity Position - Liquidity position of the firms leads to easy
payments of dividend. If the firms have high liquidity, the firms can
provide cash dividend otherwise, they have to pay stock dividend.
 Sources of Finance - If the firm has finance sources, it will be easy to
mobilize large finance. The firm shall not go for retained earnings.

17.  Growth Rate of the Firm - High growth rate
implies that the firm can distribute more dividend
to its shareholders.
 Tax Policy - Tax policy of the government also
affects the dividend policy of the firm. When the
government gives tax incentives, the company
pays more dividend.
 Capital Market Conditions - Due to the capital
market conditions, dividend policy may be
affected. If the capital market is prefect, it leads to
improve the higher dividend.