Div Policy Ymt

8/2/2019 Div Policy Ymt

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Dividend Policy refers to the explicit orimplicit decision of the Board of Directorsregarding the amount of residualearnings (past or present) that should bedistributed to the shareholders of thecorporation.

This decision is considered a financing decisionbecause the profits of the corporation are animportant source of financing available to thefirm.


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CorporatePAT

Retained

earnings

Dividend

policy


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A dividend is a discretionary paymentmade to shareholders

The decision to distribute dividends issolely the responsibility of the board ofdirectors

Shareholders are residual claimants ofthe firm (they have the last, and residualclaim on assets on dissolution and onprofits after all other claims have beenfully satisfied)


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Three different types of dividend:

1. Cash Dividend

most common portion of earnings paid out to shareholders typically on an ongoing basis

2. Stock Dividend give shareholders new shares of stock in lieu of cash

as a dividend

increases the number of shares outstanding same effect as a stock split

3. Special Dividend orStock Repurchase special dividend = a large, one time dividend stock repurchase = distribute cash to shareholders

by firm buying stock


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Declaration Date this is the date on which the Board of Directors meet and

declare the dividend. In their resolution the Board will setthe date of record, the date of payment and the amountof the dividend for each share class.

when CARRIED, this resolution makes the dividend acurrent liability for the firm.

Date of Record

Date, set by the issuing company, on which an individualmust own shares in order to be eligible to receive a declareddividend or capital gains distribution .

is the date on which the shareholders register is closed

after the trading day and all those who are listed willreceive the dividend.


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Ex dividend Date is the date that the value of the firms common shares will reflect

the dividend payment (ie. fall in value) ex means without. At the start of trading on the ex-dividend date, the share price

will normally open for trading at the previous days close, less thevalue of the dividend per share. This reflects the fact thatpurchasers of the stock on the ex-dividend date and beyondWILL NOT receive the declared dividend.

Date of Payment

is the date the cheques for the dividend are mailed out to theshareholders

http://www.sec.gov/answers/dividen.htm
http://www.sec.gov/answers/dividen.htmhttp://www.sec.gov/answers/dividen.htm


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Declaration Date

The BoardMeetsand passes themotion tocreatethe dividend

Ex Dividend Date is determined

by the Date of Record.The market value of the sharesdrops by the value of the dividendper share on market openingcomparedto the previous days close.

Date ofRecord

2 business days prior to the Date of Record

Date ofPayment


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most common type of dividend

level of dividends often measured by dividend

yield:

dividend yield =

measures % return earned by investor from

dividends alone firms dividend policy can also be measured

by payout ratio:

Dividend payout ratio =

P

D

pricestock

dividendannual

EPS

D

shareperearnings

dividendannual


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Only real effect is to increase number ofshares and dilute the value of each share

A stock split is essentially just a large stock

dividendExample:

Firm has 100,000 shares, each worth $100 Does a 2-for-1 stock split

Doubles number of shares, but does not changeanything about firm There should now be 200,000 shares, each worth

$50 No difference to shareholders


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Firms with large amounts of excess cashsometimes pay out large dividends

Firms are normally very explicit about thelarge dividend being a special dividend


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Gordon's Growth Model Walters valuation model

Dividend policy is relevant and canaffect the value of share and firm.

Bird in hand is worth two.

Investors value the firm more whenthey get dividend.

Considers that investment anddividend decision of a firm areinterrelated.

A firm should or should not pay

dividends depends upon whether ithas got suitable investmentopportunities to invest retainedearnings .

r > ke, payout ratio= 0

r


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Assumption:

1) g= br

2) Ke> g

Assumptions

1) All investment proposals arefinanced through retained earnings

and no external finance is availableto the firm.

2)Ke and r are constant.

3)Firm has infinite life.


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Po = E1(1-b)Ke- br

P = D + r(E-D)/ke

Ke

Where

Po = current ex-dividend market priceof equity share

E1 = expected earning per share

b = retention ratio

1-b = dividend payout ratio

Ke = cost of capital

br = g = growth rate of dividend

Where

P = current market price of share

E = earning per share

D = dividend per share

E- D = retained earning per share

r= return on firms investment

K = cost of equity capital


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Following information is available inrespect of ABC Ltd.

EPS: Rs. 10, Ke: 0.1 Find out the market price of share under

different rate of return r= 8%, 10% & 15%

for different payout ratios of 0, 4, 8 & 10.


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Following information is available inrespect of XYZ Ltd.

EPS: Rs. 10, Ke: 0.1 Find out the market price of share under

different rate of return r= 8%, 10% & 15%

for different payout ratios of 0%, 40%, 80%& 100%.


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Div Policy Ymt

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