Final Dividend Policy
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The Great Eastern shipping company has not declared dividend for last 15 years
DIVIDEND POLICY
Jitendra Singh Aravali Institute of Management 1
Aravali Institute of Management
September 22, 2009
Dividend policy involves decision to pay out earnings or to retain them for re-investment
Dividend Policy Is it important?? ???? 2
Aravali Institute of Management
September 22, 2009
Relevant Terms Dividend Dividend Payout
3
Ratio Retention Ratio Bonus Share Splitting of Share Capital Gain- Short Term Long Term Aravali Institute of Management
September 22, 2009
FACTORS Status of the company & available
opportunities Stability of Dividends Legal, Contractual and Internal Constraints Owner’s Consideration Capital Market Consideration Optimum Inflation
Utilization of Earning
4
Aravali Institute of Management
September 22, 2009
Status of the company & available opportunities
Growth company v/s Mature Company Available Projects or opportunities
Wealth Maximisation Sufficient funds to finance growth 5
Aravali Institute of Management
September 22, 2009
Stability of Dividend Constant Dividend Per Share- Dividend Equalization Reserve
Constant payout Ratio Stable dividend plus extra Dividend
Why stable dividend??????????? ??? 6
Desire for current Income Informational Content Aravali Institute of Management Institutional Investors
September 22, 2009
Legal & Contractual Constraints Capital Impairment rules Net Profits Insolvency
Insolvency? ???? By Liabilities > Assets By default in Payment
Contractual Requirements
7
Dividend percentage Restriction Fixed Dividend Restriction Aravali Institute of Management Fixed Retention Restriction
September 22, 2009
Internal Constraint Liquid Assets Financial Requirement Availability of Funds Earning Stability Control
UNUSED DEBT CAPACITY 8
Aravali Institute of Management
September 22, 2009
Owners Consideration The Tax Status of the shareholder Opportunity Cost Dilution of Ownership
9
Aravali Institute of Management
September 22, 2009
Other factors Easy Access Institutional Buyers Inflation
10
Aravali Institute of Management
September 22, 2009
Forms of Dividend Cash Dividend Bonus Shares Shares Split Buyback of Shares
11
Aravali Institute of Management
September 22, 2009
Bonus Share It Involves payment to existing owners of dividend in the form of share
Stock Splits It is a method commonly used to lower the market price of shares by increasing the number of shares belonging to each shareholder 12
Aravali Institute of Management
September 22, 2009
Forms of Dividend
13
BONUS SHARE Equity Share before bonus issue Equity share ( 30000 Share of Rs 100 each)- Rs 30,00,000 Share premium- ( Rs 25 per share) - Rs 7,50,000 Retained earnings - Rs 62,50,000 Equity portion after bonus issue(1:2) Equity share ( 45000 Share of Rs 100 each)Aravali Institute of Management September 22, 2009 Rs 45,00,000
Forms of Dividend
14
SPLIT SHARE Equity Share before bonus issue Equity share ( 30000 Share of Rs 100 each)- Rs 30,00,000 Share premium- ( Rs 25 per share) - Rs 7,50,000 Retained earnings - Rs 62,50,000 Equity portion after split issue(10:1) Equity share ( 300000 Share of Rs 10 each)Rs 30,00,000 Aravali Institute of Management September 22, 2009 Share premium- (Rs 2.5 per share)
Bonus Share Bonus share is the distribution of shares free of cost to the existing shareholder Illusion or real Dividend
15
Aravali Institute of Management
September 22, 2009
Benefit of Bonus share to Shareholder Tax Benefit Indication to higher future profit Future dividend may increase Psychological Value
16
Aravali Institute of Management
September 22, 2009
Benefit to Company Conservation of Cash Only mean to pay dividend under liquidity
crunch More attractive share price
17
Aravali Institute of Management
September 22, 2009
Limitation of Bonus Share
Shareholder’s wealth remains unaffected Costly to administer
18
Aravali Institute of Management
September 22, 2009
Legal Restriction on Bonus share Residual reserve criteria- 40% of the
19
increased paid up capital Profitability criteria- 30% of the average PBT for the last three years should be at least equal to 10% of the increased paid up capital All partly share be made fully paid The company should not default in repayment of fixed deposits, interest or principal or debenture Aravali Institute of Management September 22, 2009 Revaluation reserve cannot be used
Legal Restriction on Bonus share Suppose Paid up Capital- 80 Crore Reserves- 100 Crore Net worth- 180 Crore Average PBT for last three years- 50 Crore Find the Bonus ratio
20
Aravali Institute of Management
September 22, 2009
Advantages of share split
Make share attractive Higher profit in future Higher dividend to shareholders
21
Aravali Institute of Management
September 22, 2009
Jitendra Singh Aravali Institute of Management 22
Aravali Institute of Management
September 22, 2009
DIVIDEND POLICY
Jitendra Singh Aravali Institute of Management 1
Aravali Institute of Management
September 22, 2009
Dividend policy involves decision to pay out earnings or to retain them for re-investment
Dividend Policy Is it important?? ???? 2
Aravali Institute of Management
September 22, 2009
Relevant Terms Dividend Dividend Payout
3
Ratio Retention Ratio Bonus Share Splitting of Share Capital Gain- Short Term Long Term Aravali Institute of Management
September 22, 2009
FACTORS Status of the company & available
opportunities Stability of Dividends Legal, Contractual and Internal Constraints Owner’s Consideration Capital Market Consideration Optimum Inflation
Utilization of Earning
4
Aravali Institute of Management
September 22, 2009
Status of the company & available opportunities
Growth company v/s Mature Company Available Projects or opportunities
Wealth Maximisation Sufficient funds to finance growth 5
Aravali Institute of Management
September 22, 2009
Stability of Dividend Constant Dividend Per Share- Dividend Equalization Reserve
Constant payout Ratio Stable dividend plus extra Dividend
Why stable dividend??????????? ??? 6
Desire for current Income Informational Content Aravali Institute of Management Institutional Investors
September 22, 2009
Legal & Contractual Constraints Capital Impairment rules Net Profits Insolvency
Insolvency? ???? By Liabilities > Assets By default in Payment
Contractual Requirements
7
Dividend percentage Restriction Fixed Dividend Restriction Aravali Institute of Management Fixed Retention Restriction
September 22, 2009
Internal Constraint Liquid Assets Financial Requirement Availability of Funds Earning Stability Control
UNUSED DEBT CAPACITY 8
Aravali Institute of Management
September 22, 2009
Owners Consideration The Tax Status of the shareholder Opportunity Cost Dilution of Ownership
9
Aravali Institute of Management
September 22, 2009
Other factors Easy Access Institutional Buyers Inflation
10
Aravali Institute of Management
September 22, 2009
Forms of Dividend Cash Dividend Bonus Shares Shares Split Buyback of Shares
11
Aravali Institute of Management
September 22, 2009
Bonus Share It Involves payment to existing owners of dividend in the form of share
Stock Splits It is a method commonly used to lower the market price of shares by increasing the number of shares belonging to each shareholder 12
Aravali Institute of Management
September 22, 2009
Forms of Dividend
13
BONUS SHARE Equity Share before bonus issue Equity share ( 30000 Share of Rs 100 each)- Rs 30,00,000 Share premium- ( Rs 25 per share) - Rs 7,50,000 Retained earnings - Rs 62,50,000 Equity portion after bonus issue(1:2) Equity share ( 45000 Share of Rs 100 each)Aravali Institute of Management September 22, 2009 Rs 45,00,000
Forms of Dividend
14
SPLIT SHARE Equity Share before bonus issue Equity share ( 30000 Share of Rs 100 each)- Rs 30,00,000 Share premium- ( Rs 25 per share) - Rs 7,50,000 Retained earnings - Rs 62,50,000 Equity portion after split issue(10:1) Equity share ( 300000 Share of Rs 10 each)Rs 30,00,000 Aravali Institute of Management September 22, 2009 Share premium- (Rs 2.5 per share)
Bonus Share Bonus share is the distribution of shares free of cost to the existing shareholder Illusion or real Dividend
15
Aravali Institute of Management
September 22, 2009
Benefit of Bonus share to Shareholder Tax Benefit Indication to higher future profit Future dividend may increase Psychological Value
16
Aravali Institute of Management
September 22, 2009
Benefit to Company Conservation of Cash Only mean to pay dividend under liquidity
crunch More attractive share price
17
Aravali Institute of Management
September 22, 2009
Limitation of Bonus Share
Shareholder’s wealth remains unaffected Costly to administer
18
Aravali Institute of Management
September 22, 2009
Legal Restriction on Bonus share Residual reserve criteria- 40% of the
19
increased paid up capital Profitability criteria- 30% of the average PBT for the last three years should be at least equal to 10% of the increased paid up capital All partly share be made fully paid The company should not default in repayment of fixed deposits, interest or principal or debenture Aravali Institute of Management September 22, 2009 Revaluation reserve cannot be used
Legal Restriction on Bonus share Suppose Paid up Capital- 80 Crore Reserves- 100 Crore Net worth- 180 Crore Average PBT for last three years- 50 Crore Find the Bonus ratio
20
Aravali Institute of Management
September 22, 2009
Advantages of share split
Make share attractive Higher profit in future Higher dividend to shareholders
21
Aravali Institute of Management
September 22, 2009
Jitendra Singh Aravali Institute of Management 22
Aravali Institute of Management
September 22, 2009
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