Kinnari vora

Pooja palande
1334
Ruta patel

Dividend Policy: factors

affecting dividend policy
and dividend decision
models.

Dividend
A dividend is a distribution to
shareholders out of profit or reserve
available for this purpose.
- Institute of Chartered Accountants
of India
Dividend refers to the corporate net
profits distributed among share
holders.

Types of dividend
Final dividend
Interim dividend
Preference dividend

Dividend policy
Dividend policy involves decision to
payout earnings or to retain them for
re investment.
Dividend policy of a firm determines
what preparation earnings is paid to
shareholders by way of dividend and
what preportion is poughed back in
the firm for re investment purpose.

Factors Determining the dividend policy

1. Dividend Payout ratio:

2. Dividend Stability :
. Constant dividend per share
. Constant dividend per share
. Constant dividend per share plus extra
dividend

3. Legal contractual and Internal

constraints and restriction:
A) Legal requirement: legal stipulation do
not requires a dividend declaration but
they specify the condition under which
dividends must be paid such condition
pertain to) Capital impairment
) Net profits
) Insolvency

B) Contractual Requirements:
C) Internal constrain:

Liquid asset
Growth prospects
Financial requirement
Availability of funds
Earning stability and control

4. Owners Consideration: the dividend

policy is also affected by the owners
consideration of
Their opportunity of investment
The dilution of ownership
5. Capital market consideration
6. Inflation

Dividend decision model

Walters model
Prof. James E Walter argued that in
the long-run the share prices reflect
only the present value of expected
dividends. Retentions influence stock
price only through their effect on
future dividends. Walter has
formulated this and used the
dividend to optimize the wealth of
the equity shareholders.

Assumption
Constant EPS and DPS
IRR and cost of capital also are also
constant
Internal financing
The firm has very long life financing
through retained earnings.

Gordon Growth Model

According to Prof. Gordon, Dividend Policy almost
always affects the value of the firm. He Showed
how dividend policy can be used to maximize the
wealth of the shareholders.
The main proposition of the model is that the value
of a share reflects the value of the future dividends
accruing to that share. Hence, the dividend
payment and its growth are relevant in valuation of
shares.
The model holds that the shares market price is
equal to the sum of shares discounted future
dividend payment.

Assumption

All equity firm

No external Financing
Constant Returns
Constant Cost of Capital
Perpetual Earnings
No taxes
Constant Retention
Cost of Capital is greater then growth rate
(k>br=g)

Modigliani and Millers

Model
The price of a company is
determined by its earnings
potentiality and investment policy
and not by the pattern of income
distribution.

Assumption

Capital markets are perfect

No transaction cost
Fixed investment policy
No tax
Risk does not exist.