Bhupendra Pt Singh Imrt b School Lucknow-Divident-Policy

8/14/2019 Bhupendra Pt Singh Imrt b School Lucknow-Divident-Policy

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Presented by :

BHUPENDRA PRATAPSINGH


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Introduction

Net earning has two parts- Retained earningand Dividends

Retained earning used for further investment

Dividends are paid in cash to shareholdersDividend increases the value of share


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Practical Consideration in Paying

DividendsDepend upon firms financial needs, growth

plans and investment opportunitySignaling information about prospects of

the companyInvestor preference for dividend than

capital receipts for his own investmentsControl over the company may be lost

Resolution of investors uncertaintyAbility to raise additional financeClosely / Widely Held Company


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Firms need for fund

Growing firm generally keep major proportion of netearning.

Growth firms have large number of investmentopportunity hence they should give precedence to

retention of earning.Matured firms have infrequent investmentopportunity hence they should distribute most oftheir earning.It is argued that when IRR (return on investment) is

greater than cost of capital, it is profitable to reinvestthe net earning or most of it.Retained earnings are preferred than external equity

as they does not involve floatation costs.

Some companies prefer to raise external equity forfinancing investment decision.


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Investor preference for dividend thancapital receipts

Some shareholders may prefer neardividends than future dividend or capitalgain.

Depends upon economic status, the effectof tax differential on dividends and capitalgains.

In closely held companies, director knowsshareholders expectations well and framedividend policy accordingly.

Institutional investors avoid speculation


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Control over the firm

If dividends are paid, cash may affected

For further expansion company may have toissue new share

The control of existing shareholders will bediluted if they do not want or cannot buynew shares

Hence payment of dividend may withheld

and earning may be retained


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Investor preference for dividend than

capital receiptsWidely held companies : Small investors,

Retired or old person and Wealthy

investors.Shareholders income may go against

companys investment and long termgrowth

Management should properly trade offbetween dividend and retained earning


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Resolution of investorsuncertainty

Dividends have informational value.

It resolves uncertainty in the mind of investor.

Companies generally have to pay smallamount of income even when earnings fall.

It conveys that future of the company isbright.


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Other Practical Consideration in

Paying DividendsRisk taking capability of firm

Firms constraints- financial and legal.

Policy of the company: whether stabledividend per share or payout ratio

Liquidity requirement

Taxation treatment


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Other Practical Consideration in

Paying DividendsTemporary excess cash on account of windfall

gains and not the better investment optionavailable to firm

Capital Budgeting decision-- If policy is independent (No impact)- If Dependent (Higher payout means lower

capital budgeting)


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Stability of dividends

It has the positive effect on market price ofthe share.

It also mean regularity in paying some

dividend annually.Three forms of dividend stability

Constant dividend per share (dividend rate)

Constant payoutConstant dividend per share plus extra

dividend.


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share

In India, companies announces dividend as apercent of the paid-up capital per share.

Dividend rate may increase.

EPS

DPS

Time

EPS

&

DPS


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Constant Dividend per Share plusExtra Dividend

Generally adopted by companies withfluctuating earnings.

Policy to pay a minimum dividend per sharewith a step up feature.

Paying extra in period of prosperity.

Known as interim dividend with finaldividend.

It helps in paying dividend without adefault.


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dividends

It has several advantages.

Resolution of investors uncertainty.

Investors desire for current income.

Institutional investors requirements.

Raising additional finances.


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anger o s a y odividends

Once established, difficult to change.

It creates a clientele that depends on it.

Have to maintain the stability even duringlean years.

Hence dividend rate should be fixed atconservative figures.


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Constant Payout

The rate of dividend to earning is known aspayout ratio.

Some company may follow a policy of

constant payout ratio.Paying a fixed percentage of earning per

year.

Amount of dividend fluctuates in directproportion to earning.

In losses, no dividend shall be paid.


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Constant Payout

EPS

DPS

Time

EPS

and

DPS

C t i t i


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Constraints on payingdividends

A high leveraged firm expected to retainmore to strengthen its position.

Raising much external equity willadversely affect the firms financialflexibility.

Financial flexibility includes the firmsability to access external funds at later

date.Access to capital market.

Restriction in loan agreements.

Lenders may put restrictions on dividend


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Issues in dividend policy

Low policy payout may produce highershare price but not always

Dividend is a current earning while

capital gain is a future earningDividend yield = dividend per share/

market price per share

Dividend are generally taxed more than

capital gain


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Legal and procedural aspects to be

considered in dividend policyCompanies can only pay cash dividend (with

the exception of bonus shares)

Dividend can not be declared for past yearsDividend can be declared out of the profit of

the same financial year and after providing forthe government dues and depreciation under

companies act


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ConclusionDont pay dividend on the expense of new

project can give better returns than cost ofequity

Try to avoid the new equity raising

Frame dividend policy based on

- Targeted debt-equity ratio

- Investment needs of the company- Capital market norms and tax code

- Avoid dividend cuts


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Thank YOU

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Bhupendra Pt Singh Imrt b School Lucknow-Divident-Policy

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