MODULE 5 - DIVIDEND DECISIONS.pptx

This is a ppt which contains the meaning of dividend, dividend policy, its types and factors affecting dividend policy

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 damag ed

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.