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
 Regular dividend policy:
payment of dividend is at the usual
rate. It has certain benefits to give
dividend on usual rate that are:
2. It crates confidence among the
shareholders.
3. It stabilizes the market value of
shares.
4. 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