DIVIDEND POLICY

By:
WAQAR ALI HATTAR
Contents

Dividend
Types of Dividends
Dividend Policy
Theories
 DIVIDEND

A share of the after-tax profit of a company,

distributed to its shareholders according to
the number and class of shares held by them.
Adividendis a payment made by
acorporationto itsshareholders, usually as a
distribution ofprofits.
A dividend is a distribution of a portion of a
company's earnings, decided by the board of
directors, to a class of its shareholders.
 TYPES OF DIVIDEND

1. Cash Dividend
2. Additional Shares of Stock (Stock
Dividend)
3. Property Dividend
4. Scrip Dividend
 CASH DIVIDEND

A cash dividend is money paid to

stockholders, normally out of the
corporation's current earnings or
accumulated profits.

TYPES:
a. Regular cash dividends.
b. Extra dividends.
c. Special dividends.
d. Liquidating dividends.
 CASH DIVIDENDS

a) REGULAR CASH DIVIDEND:

A cash payment made by a firm to its
owners in the normal course of business,
usually paid four times a year.
b) EXTRA DIVIDEND:
A non-recurring distribution of cash to
shareholders which is of unusually large
size or different date of issue compared to
normal dividendspaid out by the
company
 CASH DIVIDEND

c) SPECIAL DIVIDENDS:
It is one-time distribution of corporate
earnings to company shareholders.
For example, in December 2004,
Microsoft paid a special dividend of $3 per
share. The total payout of $32 billion was
the largest one-time corporate dividend in
history. Founder Bill Gates received about
$3 billion , which he pledged to donate to
charity.
 CASH DIVIDENDS

d) LIQUIDATING DIVIDENDS:
It is usually means that some or all of the
business has been liquidatedthat is, sold off.
Example: ABC International's board of directors
declares a liquidating dividend of $1,600,000. It
records the dividend declaration with this entry:
 STOCK DIVIDEND

A payment made by a firm to its owners

in the form of stock, diluting the value of
each share outstanding.
Stock Split: An increase in a firms
shares outstanding without any change in
owners equity.
ABC International declares a stock
dividend to its shareholders of 10,000
shares. The fair value of the stock is
$5.00, and its par value is $1. ABC
records the following entry:
 PROPERTY DIVIDEND
A property dividendcan either include shares of a
subsidiary company or physical assets such as
inventories that the company holds.
Example: ABC International's board of directors
elects to declare a special issuance of 500
identical, signed prints by Pablo Picasso, which the
company has stored in a vault for a number of
years. The company originally acquired the prints
for $500,000, and they have a fair market value as
of the date of dividend declaration of $4,000,000.
ABC records the following entry as of the date of
declaration to record the change in value of the
assets, as well as the liability to pay the dividends:
 SCRIP DIVIDEND

A company may not have sufficient funds

to issue dividends in the near future, so
instead it issues a scrip dividend, which is
essentially a promissory note. This
dividend creates a note payable.
Example: ABC International declares a $250,000 scrip
dividend to its shareholders that has a 10 percent interest
rate. At the dividend declaration date, it records the
following entry:
 DIVIDEND POLICY

It is the set of guidelines a company uses

to decide how much of its earnings it will
pay out to shareholders.
It also refers to the explicit or implicit
decision of the Board of Directors
regarding the amount of residual earnings
(past or present) that should be
distributed to the shareholders of the
corporation.
It is often called the Dividend Puzzle.
THEORIES
 DIVIDEND IRRELEVENCE THEORY

The propagators of this school of thought

were France Modigliani and Merton Miller
(1961).
They state that the dividend policy
employed by a firm does not affect the
value of the firm. They argue that the
value of the firm is dependent on the
firms earnings which result from its
investment policy, such that when the
policy is given the dividend policy is of no
consequence
 IRRELEVENCE THEORY

Conditions that face a firm operating in a

perfect capital market, either;
1. The firm has sufficient funds to pay
dividend
2. The firm does not have sufficient funds
to pay dividend therefore it issues stocks
in order to finance payment of dividends
3. The firm does not pay dividends but the
shareholders need cash.