DIVIDEND POLICY CONCETP OF DIVIDEND POLICY Dividend policy involves the decision to pay out earning or to retain them

for reinvestment in the firms. A dividend is a distribution of earning to shareholder generally paid in the form of cash or stocks: The portion of after tax earning not paid out as dividend is called retained earning. A dividend payout ratio is the percentage of earning paid to shareholder. IMPORTANCE OF DIVIDEND POLICY: It affects investor attitudes and the firms financial structure flow of funds, liquidity, growth rate and cost of capital. The goal of dividend policy is to maximize its contribution toward increasing shareholder wealth. An optimal dividend policy strikes that balance between current dividend, and future growth which maximize the price of a firms stock and hence shareholders wealth. DIVIDEND POLICY THEORY: One school claim that the proportion of earning paid out in dividend is irrelevant. Other believes that dividend is important in affecting the value of their firms common stock. DIVIDEND IRRELEVENT POLICY: The dividend irrelevance viewpoint states that in a world without taxes, transaction cost or other market imperfection, Dividend policy has no effect on the firms market value. The only important determinates of a companys market value are the expected level and risk of its cash flow. The value of the firms market value depends only on the firms investment policy not on the way a firms splits its earning between dividend and reinvestment.

The dividends relevance viewpoint states that in a world with market imperfection such as taxes, flotation cost a transaction costs a companys dividend policy affect its market value.

ARGUMENTS FOR THE DIVIDENDS RELEVANCE VIEW POINT 1. Bird in the hand theory. 2. Informational content (or signaling) effect. The reaction of the market to dividend action may affect stock prices favorably or unfavorably depending on the inferences drown by investor. CLIENTELE EFFECT: The clientele effect implies that investors are attracted to firms whose dividend polices meet their particular need. RESIDUAL THEORY OF DIVIDENDS The residual theory of dividends asserts those dividends are paid out of the residuals or leftover earning reaming after profitable investment opportunities are exhausted. The primary issue of residual theory is decision that can utilize the fund, Corporation or stockholder. USING TH RESIDUAL THEORY OF DIVIDENDS INVOLVES FOUR STEP DETERMINE THE OPTIMAL CAPITAL BUDGET DETERMINE THE AMOUNT OF EQUITY NEEDED TO FINANCE THE OPTIMAL CAPITAL BUDGETS PAY DIVIDEND, ONLY IF MORE EARNINGS ARE AVAILABLE ITEMS ON NEEDE TO SUPPORT TH OPTIMAL CATITAL BUDGET. TYPES OF DIVIDEND POLICIES: There are many distinct dividend policies but most policies fall into one of three categories.

A STABLE DIVIDNED POLICY A stable dividend policy is characterized by the tendency to keep a stable dollar amount of dividend per shares from period to period. Under this policy dividend changes will normally behind earning changes. Firms are reluctant to lower their dividend payment even in times of financial distress.

REANOSN FOR STABLE DIVIDNED POLICY Many business executives believe that stable dividend policy lead to higher stock price. Investor may view constant or steadily increasing dividend, as more certain than a fluctuating cash dividends payment. Dividend stability is required for legal listing A CONSTANT DIVINED POYOUT RATIO POLICY A constant dividend payout ratio policy is one in which a firm pays out a constant percentage of earning a dividend. Dividend, last years (1.4) (1,000,000 shares) = 1400,000 Dividend payout ratio = 14000,000/ 4,000,000 = 0.35 or 35 % Dividend this year = (0.35) (3,600,000) = 1,260,000 Dividend per share = 1,260,000/1,000,000 = 1.26

A REGULAR DIVIDEND PLUS EXTRA POLICY A regular dividend plus extra policy is one, which a firm maintains a low regular dividend plus an extra dividend, if warranted by the firms earning performance.