Professional Documents
Culture Documents
Investor preference for Dividends 1. Self-control and Dividends 2. Aversion to regret and Dividends Information signaling Clientele effect Agency costs
Dubious reasons
Bird-in-hand fallacy Temporary excess cash
Payout Ratio
Stability
Funds Requirement Liquidity Access to External Sources of Financing Shareholder Preferences Difference in the cost of external equity and retained earnings Control Taxes
1. 2. 3. 4. 5.
Investment decisions. External equity is more expensive than internal equity. Most promoters dislike to dilute their stake in equity. Difficulty in raising debt financing. With the help of the dividend decision of the firm, management conveys information about the prospects of the firm.
Dont pay dividend at the expense of positive NPV projects. 2. Minimize the need to sell external equity. 3. Define a target dividend payout ratio along with target debt-equity ratio. 4. Avoid dividend cuts.
1.
Formula :~
Dt = Et - It Where; Dt = Dividends paid in year t Et = Earnings in year t It = Investment budget in year t
Formula :~
Dt = Pt * Et Where; Pt = Dividend payout ratio for the year t (Dt/ Et) Dt = Dividends paid in year t Et = Earnings in year t
John Linter in 1956 wrote about corporate dividend behaviour; 1. Firms set long-run payout ratios. 2. Managers are concerned more about change in the dividend than the absolute level of dividend. 3. Dividends are sticky in nature because managers are reluctant to effect dividend changes that may have to be reversed.
Dt = cr EPSt + (1 - c) D(t - 1) Where; Dt = Dividend per share for year t c = Adjustment rate r = target payout ratio EPSt = Earning per share for year t
The important company law pertaining to dividends are mentioned below; 1. Companies can pay only cash dividend except of bonus share. 2. Before dividend declaration a percentage of profit should be transferred to the reserves of the company. 3. Dividends cannot be declared for past years.
Board resolution
Shareholders approval
Record date
Dividend payment
Reason for issuing bonus shares; 1. To bring market price per share more popular. 2. To increase the number of outstanding shares. 3. To decline rate of dividend. 4. To increase Share capital of the company. 5. To improve the possibility of raising additional funds.
Regulation of bonus shares; 1. Bonus issue is made out of free reserves 2. Pending conversion into shares, FCDs, PCD, are can receive bonus shares. 3. Cannot be made in lieu of dividend payment. 4. Cannot be made on partly paid up shares. 5. The articles of association of the company should be authorize a bonus share.
Tender method
Efficient allocation of resources Positive signal Price stability Tax advantage Control Voluntary character Capital structure changes
Unfair advantage
Manipulation
Excessive payment