DIVIDEND POLICY2

8/7/2019 DIVIDEND POLICY2

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DIVIDEND POLICYDIVIDEND POLICYPresented by:

Sheeba

Swetha


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Dividend PolicyDividend Policy

Dividend Policy refers to the policy of managementconcerning to the quantum of profit to be distributed to

shareholders as returns on their investments.

Factors influencing Dividend Policy are as follows:Factors influencing Dividend Policy are as follows:

a) Legal Restrictions

b) Magnitude and trends.

c) Desire and type of shareholders.

d) Nature of Industry.

e) Age of the company.

f) Future Financial requirements.

g) Government economic policy.

h) Inflation.


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FORMS OF DIVIDENDFORMS OF DIVIDEND

Dividend is that portion of the income that is paid to

the shareholders. The various forms of dividend are:

$$ Cash DividendCash Dividend: Dividend paid by the companyto its shareholders in the form of cash is known as

cash dividend. It is most desirable by the investors

because the investors after receiving their part of

share in cash can invest in the manner they desire.The firms can distribute cash dividend only when it

has liquid resources.


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Cont..Cont..

$ Scrip or Bond DividendScrip or Bond Dividend: when the

earning of the company ensure that the

shareholders can be paid dividend but the

cash position is temporarily weak in such asituation company issues promissory note

which may or may not be interest bearing.

The shareholders can encash these

promissory notes on the maturity. The

company can declare scrip or bond dividend

only when it earns profits.


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Cont..Cont..

$ Property DividendProperty Dividend: The dividendpaid or declared by the company in the form

of assets or property other than cash isknown as property dividend. This form of

dividend may be declared where ever there

are assets that are no longer necessary in

the operations of the business.


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Cont..Cont..

$ Stock DividendStock Dividend:Means issue of additionalshare to the existing shareholders. If a company

capitalizes its earnings and distributes the

capitalized earnings in the form of shares to the

existing shareholders, such shares are known as

bonus shares.

Additional shares issued no doubt will increaseincome of the shareholders but it will increase the

burden to the company, as the company has to pay

dividends on those additional shares.


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Types of Dividend PolicyTypes of Dividend Policy

$$ Regular Dividend policyRegular Dividend policy: Payment of dividend atthe usually rate is termed as Regular Dividend. The

investors such has retired persons , widows and other

economically weaker persons prefer to get Regular

Dividend.

Advantages:Advantages:

Establish Profitable Record Of The Company.

Create Confidence amongst the share holders.

It aids in long term financing and renders financing

easier.

It stabilizes the market value of share.

Avoids heavy tax on accumulated profits.


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Stable Dividend Policy.Stable Dividend Policy.

Means consistency or lack variability in thestream of dividend payments. In precise it

means payment of certain minimum amount

regularly.

Three Forms OfStable Dividend Policy.Three Forms OfStable Dividend Policy.

a. Constant Dividend per shareConstant Dividend per share: Payingfixed dividend irrespective of the level of earnings year

after year . Such firms, usually, create a Reserved forDividend Equlisation to enable them pay the fixed

dividend even in the year when the earnings are not

sufficient or loss. This policy is most suitable to concern

whose earnings are excepted to remain stable over a

number of years.


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ContCont

b. Constant Pay out RatioConstant Pay out Ratio: Means payment ofa fixed percentage of net earning as dividends every

year . The amount on dividend in such a policy

fluctuates in direct proportion to the earning of the

company. This policy is preferred by the firms because

it is related to pay according to companys ability.

c. Stable Rupee Dividend Plus ExtraStable Rupee Dividend Plus Extra

DividendDividend:Some companies follow a policy of payingconstant low dividend per share plus an extra dividend

in the years of high profits . This policy is most suitable

to firm having fluting earnings from year to year.


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Advantages OfStable Dividend Policy.Advantages OfStable Dividend Policy.

It is sign of continued normal operations of thecompany.

It meets the requirements of institutional investors.

It improves the credit standing and makes financer

easier.

Disadvantages.Disadvantages.

It is difficult to change.

If dividend are not paid to share holders may affect

the financial standing of the company.

It affect the market value of the share.


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Cont..Cont..

$$ Irregular Dividend PolicyIrregular Dividend Policy :

Companies may follow this policy on

account of the following.

a. Uncertainty of earning.

b. Unsuccessful business operations.

c. Lack of liquid resources.

d. Fear of Adverse effect of regular dividends .


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ContCont

$$No dividend PolicyNo dividend Policy:A company

may follow this policy because of itsunfavorable working capital position oron account of requirements of funds forfuture expansion and growth.


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Bonus issueBonus issue

Dictionary meaning of bonus shares:

a premium or a gift, usually of stock, by a

corporation to shareholder

OR

an extra dividend paid to its shareholders in a

joint stock company from its surplus profit


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BONUS SHARES CONTD.BONUS SHARES CONTD.

Legal context the meaning is not same:

A bonus is neither a dividend nor a gift.

It is governed by many regulations.

Acc to sec 205 Companies Act,1956

no dividend can be paid except in cash.

Cannot be termed gift-represent pastsacrifice of shareholders.


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CONTD..CONTD..

Many a times, a co. is not in position to pay

Bonus in cash inspite of sufficient profits

because of unsatisfactory cash position, or

because of its adverse effects on the working

Capital of the Co.

In such cases, if Co. so desires and AoA of

Co. provide, it can pay bonus to shareholder in formof shares by making partly paid shares as fully paid

or by the issue of fully paid bonus shares.


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Advantages to Co:Advantages to Co:

Available capital carry on larger and profitable

business.

Financing helps the Co. get rid of market forces.

Co pays in form of bonus shares, in value ofshares, its liquid resources are maintained and

working capital is not affected.

Cheapest method of raising additional capital for

expansion of business.


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Advantages to investors:Advantages to investors:

Permanent source of income.

Investor can easily sell these shares and getimmediate cash, if they desire.


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Disadvantages:Disadvantages:

Drastic fall in future rate of dividend.

Fall in market prices in future, unhappinessamong shareholder.

Reserves after bonus issue declines, leaves

lesser security to investors.


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Dividend Policy in IndianDividend Policy in IndianCorporate TaxCorporate Tax

Objective is to maximization of wealth of

shareholders.

A firm should retain earnings if it has profitableinvestment opportunities, giving a higher rate of

return than the cost of retained earnings, otherwise

should pay as dividends.

(retained earnings-active decision variable,

dividends-passive residual)


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Dividend Policy in IndianDividend Policy in IndianCorporate TaxCorporate Tax

In practice, dividends are determined first andretained earnings constitute residual.

Belief- stable dividend policy with high pay out ratio,

maximize market value of shares.

This policy is proved to be successful.

Therefore it is rightly said retained earnings shouldbe treated as active decision variable, anddividends as passive residual, but in practice theydo not conform in most cases.


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Thank You

DIVIDEND POLICY2

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