FINANCIAL

MANAGEMENT
BY : Aashna Dubey
Aayushi Mahajan
Akash Gupta
Akriti Rajput
Akshay Bali
Antra Sharma
 DIVIDEND
■ The term dividend refers to that portion
of profit which is distributed among the
owners / shareholders of the firm.
MEANING OF DIVIDEND POLICY
■ Dividend policy refers to the policy that the
management formulates in regards to earnings
for distribution as dividend among
shareholders. It is not merely concerned with
dividends to be paid in one year, but it is
concerned with the continuous course of action
to be followed over a period of several years.
GOALS OF DIVIDEND POLICY
• Dividend decisions should not be treated as a
short –run residual decision.
• Erratic and frequent changes in dividend
should be avoided.
• Dividend policy should be analysed in terms of
its effect on the value of the company.
• Dividend policy should be communicated
clearly to investors who may then take their
decisions in terms of their preferences and
need.
Factors affecting Dividend Policy
 TYPE OF INDUSTRY
The nature of the industry to which the company belongs has an important
effect on the dividend policy. Industries, where earnings are stable, may
adopt a consistent dividend policy as opposed to the industries where
earnings are uncertain and uneven.
 AGE OF CORPORATION
Newly formed companies will have to retain major part of their earnings
for further growth and expansion. Thus, they have to follow a conservative
policy unlike established companies, which can pay higher dividends from
their reserves.
 THE EXTENT OF SHARE DISTRIBUTION
A company with a large number of shareholders will have a difficult time
in getting them to agree to a conservative policy. On the other hand, a
closely held company has more chances of succeeding to finalize
conservative dividend payouts.
 BUSINESS CYCLES
When the company experiences a boom, it is prudent to save up and make
reserves for dips. Such reserves will help a company to maintain dividend
even in depressing markets to retain and attract more shareholders.
 OWNERSHIP STRUCTURE
The ownership structure of a company also impacts the policy. A company
with a higher promoter’ holdings will prefer a low dividend payout as
paying out dividends may cause a decline in the value of the stock.
Whereas, a high institutional ownership will favor a high dividend payout
as it helps them to increase the control over the management.
 FUTURE FINANCIAL REQUIREMENTS
Dividend payout will also depend on the future requirements for the
additional capital. A company having profitable investment opportunities is
justified in retaining the earnings. However, a company with no capital
requirements should opt for a higher dividend.
 CHANGES IN GOVERNMENT POLICIES
There could be the change in the dividend policy of a company due to the
imposed changes by the government. The Indian government had put
temporary restrictions on companies to pay dividends during 1974-75.
 PROFITABILITY
The profitability of a firm is reflected in net profit ratio and ratio of profit
to total assets. A highly profitable company have a capacity to pays higher
dividends and a company with less profits will adopt a conservative
dividend policy.
 LIQUIDITY
Liquidity has a direct relation with the dividend policy. Many a times,
company having high profit, may have majority of profit blocked
in working capital or it may acquired assets. In that case its liquidity is
poor. In that case company should pay less dividend. High dividend
payment is possible only if company has good earning and sound liquidity.
 INFLATION
Inflationary environments compel companies to retain major part of their
earnings and indulge in lower dividends. As the prices rise, the companies
need to increase their capital reserves for their purchases of fixed assets. In
case of inflationary situation, same quantity of closing stock will have
more valuation, so payment of tax also increase.
 LEGAL RULES
There are certain legal restrictions on the companies for dividend
payments. It is legal to pay a dividend only if the capital is not reduced
post payment. These rules are in place to protect creditors’ interest.
 TRENDS OF PROFITS
Even if the company has been profitable over the years, the trend should be
properly analyzed to find the average earnings of the company. This
average number should be then studied in relation to the general economic
conditions.
Dividend Relevance
DIVIDEND THEORIES

Relevance Theory: •Walter’s Model

Dividend decisions •Gordon’s Model
affect the value of
firm.

Irrelevance Theory: •Residual Theory

Dividend decisions •Miller and Modigilani
do not affect the
value of firm. Hypothesis
Relevant theories of dividend
■ WALTER’S MODEL’S THEORY:
Assumption: r and ke are constant
This model is based on :
1. Return on investment or internal rate of return(r).
2. Cost of capital or required rate of return(k).

P = [D+ r(E+D)/Ke]
Ke
Where, P = Price of equity share
D = Initial dividend per share
Ke = Cost of equity capital
r = internal rate of return
E = Earning per share
The model divides the firm into three groups
1. Growth firms(r>k)
2. Normal firms(r=k)
3. Declining firms(r<k)

CRITICISM:
r , Ke cannot be constants.
■ GORDON’S MODEL
Assumptions:
The firm is all equity firm.
All investments projects are financed by exclusively retained
earnings.
The rate of return is constant
The cost of capital remains constant
The firm has perpetual life.
There are no corporate taxes.

According to this model , a firm’s share price is dependent on

dividend pay out ratio.
P = E(1-b)
Ke-br
Where P= Price of shares
E= Earnings per share
b= Retention ratio
Ke= Cost of equity capital
br= Growth rate in r, i.e. rateof return on investment
So in
1. Growth firms
2. Normal firms
3. Declining firms
 Dividend valuation
 Dividend valuation model was given byMyron.J.gordon in
the year 1959 this model isalso called Gordon Growth
model
 Dividend valuation model is a way of valuing acompany
based on the theory that a stock valueis worth the
discounted sum of all its futuredividends payments
 It is used to value stocks based on Net presentvalue of its
future dividends
Equation

P = D1r – g
Where :
P is the value of current stock
G is the constant growth rate
D1 is the next year (future) dividend
R is the constant discounting factor or cost of equity for that
company
Zero growth model

 The dividend per share remains constant

forever and the growth rate is nil (zero)
 P = Dr
Two stage growth model
This is the simplest extension of constant growthmodel
(Gordon model) assumes that the extraordinary growth (good
or bad) will continue for finite number of years and thereafter
the normalgrowth rate will prevail indefinitely
H model
When the dividend per share , currently growing at anabove
normal rate and rate of growth is normallydeclining for a while ,
thereafter it grows at a constantnormal rate
It is based on following assumptions
The H-model is used to value a stock whenit is assumed
that the dividend growth willchange from one growth
rate to another ina linear manner.
Let ga represent the abnormal growth andlet gn represent
the normal
Using the H-model, the growth rate willchange from ga
to gn over a period ofyears, 2H.
If the period in which thistransition takes place is 2H, the
half-life ofthis transition is H.
The formula is as follows: growth abnormal from normal
value
Added from value the half-life ofthis transition is H.
The formula is asfollows: growth abnormal from
normalvalue Added from value
THANK YOU