Corporate finance - dividend policy, stock split.pdf

Corporate finance

1. Submitted by Group 10
23P064 A Kevin Silvacus
23P068 Abhishek Srivastava
23P078 Astha Mishra
23P081 Bhavya Bansal
23P089 Harshul Jain
23P105 Sagaram Pranav
23P118 Srivatsa Patnaik
Corporate Finance
Dividend policy (Incorporation of stock split,
bonus, buyback and market performance)
and SWM

2. Dividend Policy, Payout Ratio and Yield
What is Dividend?
A dividend is a distribution of earnings by a company to its shareholders in the form of cash or stock reinvestment.
What is Dividend Policy?
A dividend policy is a policy a company uses to structure its dividend payout. These structures detail specifics about
payouts, including how often, when, and how much is distributed.
3 types of Dividend Policy
Stable Dividend Policy
provide shareholders with a steady and predictable
dividend payout each year
Constant Dividend Policy
Company pays a percentage of its earnings as
dividends every year (growing and volatility)
Residual Dividend Policy
Company pays out what dividends remain after the
company has paid for CAPEX and WC (volatility)
Dividend Payout Ratio
Dividend Yield

3. Stock Split, Bonus Issue, Reverse Split & Buyback
What is Stock Split?
A stock split is when a company increases the number of its outstanding shares by dividing each share into
multiple shares.
The number of shares outstanding increases, there is no change to the company's total market capitalization
as the market price of each share will split as well. The face value of the share splits as well.
If a company splits the share in the ratio 3:1, a share holder will own 3 shares for every 1 share held.
What is Bonus Issue?
A bonus issue is when a company offers existing shareholders extra shares in a certain proportion of the
existing share holdings.
The number of shares outstanding increases, there is no change to the company's total market capitalization
as the market price of each share will decrease proportionately. The face value of the share remains same.
If a company issues bonus shares in the ratio 3:1, a share holder will own 3 additional shares for every 1 share
held.

4. Stock Split, Bonus Issue, Reverse Split & Buyback
What is Reverse Split?
A reverse split is when a company decreases the number of its outstanding shares by merging a number of
shares into a few shares.
The number of shares outstanding decreases, there is no change to the company's total market capitalization
as the market price of each share will increase correspondingly. The face value of the share increases as well.
If a company splits the share in the ratio 1:5, a share holder will own 1 shares for every 5 share held.
What is Buyback?
A buyback is when a company buys back its own shares from existing shareholders, thus reducing the number
of shares outstanding.
The number of shares outstanding decreases, company's total market capitalization decreases as the number
of shares outstanding decreases. The face value of the share remains same.
A company usually buys back the shares at a price higher than the prevailing market price.

5. Why?
Why Dividend?
Dividends provide certainty about
the company's financial well-
being. As a result, a company that
pays out a dividend attracts
investors and creates demand for
their stock.
Dividends are also attractive for
investors looking to generate
income. However, a decrease or
increase in dividend distributions
can affect the price of a security.
Investors also see a dividend
payment as a sign of a company's
strength and a sign that
management has positive
expectations for future earnings,
which again makes the stock more
attractive.
Why Stock Split?
A company often decides on a
split when the stock price is quite
high, making it expensive for
investors to acquire a standard
board lot of 100 shares.
The higher number of shares
outstanding can result in greater
liquidity for the stock, which
facilitates trading and may narrow
the bid-ask spread.
While a split, in theory, should
have no effect on a stock's price,
it often results in renewed
investor interest, which can have
a positive effect on the stock
price.
Why Bonus Shares?
Encouraging retail participation:
Increasing the number of
outstanding shares adds liquidity
and decreases a company’s stock
price, making its shares more
affordable and easier to trade for
retail investors.
Alternative to paying dividends:
Companies generating irregular
profits may issue bonus shares
rather than cash dividends to build
shareholder confidence.
Displaying financial health: A
company that issues bonus shares
demonstrates that it has sufficient
share reserves and/or profits to
reward prospective investors and
current shareholders.

6. Why?
Why Reverse Split?
Prevent delisting: If a stock price keeps falling and
goes below Rs. 1, it is at risk of being delisted from
stock exchanges that have minimum share price
rules. The company's shares then enter "penny
stock" territory and can only be bought and sold as
over-the-counter stocks.
Boost the company's image: A stock that trades in
single digits is generally viewed as a risky investment.
A reverse split gives the spurious appearance of a
more valuable stock.
Increase interest in the stock: Higher-priced stocks
attract more attention from market analysts and
more coverage by the business news media.
Increase trading in the stock: Many institutional
investors and mutual funds do not invest in stocks
worth less than a set price. Boosting the stock price,
even artificially, can increase purchases of the stock.
Why Buyback of share?
Companies buyback shares for the 3 major reasons
mentioned in the image below. Bought back shares go
into the Equity segment of Balance Sheet as Treasury
Stock. Buying back shares also increases the EPS

7. Impact of Cash dividend on Balance sheet
Company XYZ Ltd. is trading on stock exchange with 1000 shares @ Rs. 10 face value. The market price of share is
Rs. 50/share. The net income of the company is Rs. 4000. The balance sheet of the company before the
announcement of dividend is as follows:
Company XYZ Ltd. paid a dividend of Rs. 2/share. The market price of share becomes Rs. 48/share. The balance
sheet of the company post payment of dividend is as follows:
Dividend payout ratio
= 2000/4000
= 0.5

8. When a company goes for cash dividend, the following changes
are there in financial Parameters:
Retained earnings will decrease by the amount of dividend
paid
Cash will decrease by the amount of dividend paid
Income statement is not affected by payment of dividends.
However, if a company goes for dividends on preferred
stocks, it is deducted from net income to arrive at net
income available for common stock.
Statement of Cash Flows report the amount of the cash
dividends under financing activities section.
Current ratio (Current Assets/Current Liabilities) decreases
as Cash decreases
The Market Price of the stock decreases by the amount of
dividend paid per share on Ex-dividend date.
Impact of Cash dividend on Financial Parameters

9. Impact of Bonus share on Balance sheet
Company XYZ Ltd. is trading on stock exchange with 1000 shares @ Rs. 10 face value. The market price of share is
Rs. 50/share. The balance sheet of the company before the announcement of dividend is as follows:
Company XYZ Ltd. announces bonus shares in the ratio 1:10. The market price of share becomes Rs. 45.45/share.
The balance sheet of the company post payment of dividend is as follows:

10. Impact of Bonus shares on Financial Parameters
When a company issues bonus shares, the following changes are there in financial Parameters:
Retained earnings will decrease by the amount equivalent to the number of bonus shares issued x book
price of the share. Share capital will increase by the same amount.
There will be no change in the asset side of the balance sheet.
Number of shares outstanding will increase
As the number of shares increase, EPS will decrease.
As EPS decreases, P/E ratio increases

11. Impact of Stock split on Balance sheet
Company XYZ Ltd. announced stock split in the ratio 2:1. The market price of share becomes Rs. 25/share. The
balance sheet of the company post share split is as follows:
Company XYZ Ltd. is trading on stock exchange with 1000 shares @ Rs. 10 face value. The market price of share is
Rs. 50/share. The balance sheet of the company before the announcement of stock split is as follows:

12. Impact of Stock split on Financial Parameters
When a company goes for stock split, the following changes are
there in financial Parameters:
There is no change in Share Capital as well as Retained
Earnings.
There will be no change in the asset side of the balance sheet.
Number of shares outstanding will increase.
Face value of the share decreases.
As the number of shares increase, EPS will decrease.
As EPS decreases, P/E ratio increases

13. Impact of Reverse split on Balance sheet
Company XYZ Ltd. announced reverse split in the ratio 1:2. The market price of share becomes Rs. 100/share. The
balance sheet of the company post reverse split is as follows:
Company XYZ Ltd. is trading on stock exchange with 1000 shares @ Rs. 10 face value. The market price of share is
Rs. 50/share. The balance sheet of the company before the announcement of reverse split is as follows:

14. Impact of Reverse split on Financial Parameters
When a company goes for reverse split, the following
changes are there in financial Parameters:
There is no change in Share Capital as well as
Retained Earnings.
There will be no change in the asset side of the
balance sheet.
Number of shares outstanding will decrease.
Face value of the share increases.
As the number of shares decrease, EPS will increase.
As EPS increases, P/E ratio decreases

15. Impact of Buyback on Balance sheet
Company XYZ Ltd. announced buyback of 100 shares at Rs. 60/share. The balance sheet of the company post share
buyback is as follows:
Company XYZ Ltd. is trading on stock exchange with 1000 shares @ Rs. 10 face value. The market price of share is
Rs. 50/share. The balance sheet of the company before the announcement of buyback is as follows:

16. Impact of Buyback on Financial Parameters
When a company goes for buyback of shares, the following changes are there in financial Parameters:
Share Capital decreases by the amount equivalent to the number of shares x book value of the share.
Reserve and Surplus decreases by the amount equivalent to the number of shares x market premium over book
value of the share price
Cash decreases by the amount equivalent to the amount number of shares x buyback price.
Cash outflow is reflect in the Cash Flow from Financing activities
Number of shares outstanding will decrease.
There is no change in the Face value of the share.
As the number of shares decrease, EPS will increase.
As EPS increases, P/E ratio decreases

17. Dividend policy of Tata Steel
SEBI has mandated top 500 listed companies (based on market capitalization) to have a Dividend
distribution policy.
The policy came into effect from 20 April, 2017. The key points from the policy are as follows:
Purpose: To define the procedure for rewarding shareholders by sharing a portion of profits after
retaining sufficient funds for growth of the Company
Financial Considerations: Earnings, cash flow, ROI, borrowings, obligations, profit adequacy, and post-
dividend EPS.
Factors affecting payout: Capital expenditure needs, macroeconomic conditions, etc.
Dividend Target: Up to 50% of profit after tax, subject to financial performance and regulations.
Payout Process: Final dividends approved in AGM, interim by the Board, paid within 30 days.
Retained Earnings Use: For expansion, modernization, diversification, etc.
Share Classes: Currently one equity class; dividends pro-rata based on share held.
Exceptions & Reporting: Policy excludes preference shares and buybacks; disclosed on website and
annual report.
Review & Compliance: Periodic review for amendments, overseen by Company Secretary.

18.   FY18 FY19 FY20 FY21 FY22 FY23
Revenue
(Rs. in Cr)
1,23,249 1,57,669 1,39,817 1,56,294 2,43,959 2,43,353
Net
Income (Rs. In Cr)
3,996.12 10,360.06 6,545 16,896.62 33,010.09 15,495
No of
Shares-Basic (Mn)
1,036 1,146 1,146 1,165 1,221 12,222
No of
Shares-Diluted (Mn)
1,036 1,146 1,146 1,165 1,222 12,225
EPS-Basic
(Rs.)
38.57 90.41 57.11 145.00 270.33 12.68
EPS-Diluted
(Rs.)
38.56 90.40 57.11 144.99 270.13 12.67
Dividend (Rs.) 10 13 10 25 51 3.6
Dividend
Payout Ratio
25.9% 14.4% 17.5% 17.2% 18.9% 28.4%
Tata Steel- a case of Stock Split
Tata Steel has announced Stock split as follows:
03/05/2022- Stock split in the ratio of 10:1 1.
This decreased the Face Value of each share from Rs. 10
to Rs. 1
Reasons of split can be:
High price of the share was leading to lower retail interest
and management decided to increase the interest of investors
by splitting the stock
1.
Making the stock more affordable2.

19.   FY18 FY19 FY20 FY21 FY22 FY23
Revenue (Rs.
in Mn)
5,46,359 5,89,060 6,13,401 6,22,425 7,95,289 9,09,348
Net Income
(Rs. In Mn)
80,081 90,031 97,218 1,07,946 1,22,191 1,13,500
No of Shares-
Basic (Mn)
4,750 6,007 5,833 5,649 5,467 5,477
No of Shares-
Diluted (Mn)
4,758 6,022 5,848 5,662 5,482 5,489
EPS-Basic
(Rs.)
16.86 14.99 16.67 19.11 22.35 20.72
EPS-Diluted
(Rs.)
16.83 14.95 16.62 19.07 22.29 20.68
Dividend (Rs.) 1 1 1 1 6 1
Dividend
Payout Ratio
5.9% 6.7% 6.0% 5.2% 26.8% 4.8%
Wipro- a case of Stock buyback
Wipro has announced Stock buyback as follows:
20/06/2019- Buyback Offer of Rs. 10500.00 Cr. (@Rs. 325)1.
10/12/2020- Buyback Offer of Rs. 9500.00 Cr. (@Rs. 400)2.
16/06/2023- Buyback Offer of Rs. 12000.00 Cr. (@Rs. 445)3.
Wipro has announced Bonus shares as follows:
06/03/2019- Bonus shares in the ratio 1:31.
Reasons of buyback can be:
Reducing the liquidity of the shares in the market1.
Increasing the % holding of the promoters2.
Providing more value to the shareholders who are willing
to sell the shares
3.

20. References
www.investopedia.com
www.accountingcoach.com
www.moneycontrol.com
www.screener.com
www.wipro.com
www.tatasteel.com
Source: Statista, 06/03/24

21. Thank you!