Dividend Decisions

DIVIDEND DECISIONS

It is one of the major decision a finance manager has to undertake.this decision relates to the appropiation of profits earned by a business. A business has two basic options in handling the profits earned which are: to retain the profits earned(retained earnings), or distribute the

FACTORS AFFECTING DIVIDEND POLICY      

Financial requirement of business. Stability of dividends. Capital market considerations. Preferences of shareholders. Bonus shares. Inflation.

CLASSIFICATION OF DIVIDEND POLICY 

2.

3.

4.

Regular dividend policy: payment of dividend is at the usual rate. It has certain benefits to give dividend on usual rate that are: It crates confidence among the shareholders. It stabilizes the market value of shares. It helps in long term financing and renders financing easier.

CONTINUED…… Stable dividend policy: In the stable dividend policy there lacks variability in the streams of dividend payments. It has certain benefits like: 2. The investors have the full information about the levels of dividends 3. The stable dividend policy generally have support.

MODELS ON DIVIDEND POLICY 

Traditional position : their clear emphasis is on the relationship between the dividends and the stock market. According to this approach the stock value responds positively to higher dividends and negatively when there are low dividends.

CONTINUED….. 



Walter model: it was given by James Walter who considers that dividends are relevant and they do affect the share price. Gordon’s dividend capitalization model: he used the dividend capitalization approach to study the effect of the firms dividend policy on the stock price.

CONTINUED….. 

miller and Modigliani model: he propounded the MM hypothesis to explain the irrelevance of a firms dividend policy. This model was based on a few assumptions, sidelined the importance of the dividend policy and its effect there of on the share price of the firm. according to model, it is only the firms investment policy that will have

CONTINUED……. 

Rational expectation model: acc to this model, there would be no impact of the dividend declaration on the market price of the share as long as it is at the expected rate. This model suggests that alterations in the market price will not be necessary where the dividends meet the expectations.

WALTERS MODEL Similar to traditional approach, the dividend policy given by James Walter considers that dividend are relevant and they do not affect the share price. This model studied the relationship between the internal rate of return (r ) and the cost of capital of the firm(k ), to give a dividend policy that maximizes the shareholders wealth.

RELEVANCE OF DIVIDEND POLICY

There are three situations: 2. r > k :the earnings can be retained by the firm since it has better and more profitable investment opportunity than the investors. 2. r < k ; in such situation the investors will have a better investment opportunity then the firm. This suggests a dividend policy of 100% payout. 3. r = k; in such situation the dividend policy will not affect the value of the firm. This optimum dividend

ASSUMPTIONS OF WALTER MODEL 



 

Retained earnings is the only source of finance available to the firm, with no outside debt or additional equity used. r and k are assumed to be constant and thus additional investments made by the firm will not change its risk and return profiles. Firm has an infinite life. For a given value of the firm, the dividend per share and the earnings

EXPLANATION OF MODEL Acc to Walter, the market price of the share is taken as the sum of the present value of the future cash dividends and capital gains. His formula is based on the share valuation model and is arrived at in the following manner; P= d/k-g Where p= price of equity share D= initial dividend K=cost of equity capital

CONTINUED….. To reflect earnings retentions, we have P=d/k-rb Where r=expected rate of return on firms investments. b = retention rate

LIMITATIONS This model arise due to the assumptions made ...  The first assumption of exclusive financing by retained earnings make the model suitable only for all equity firms.  Walter assumes the return on investments to be constant.  Walter model ignores the business risk of the firms which has a direct impact on the value of the firms.

PRESENTED BY:       

SHIKHA SRIVASTAVA SHILPA ROHILLA NEETU KHOKAR AVINASH ANKIT CHAUDHARY RAHUL AGGARWAL AJAY BISHNOI

THANK YOU