Dividend 2

Category: Education

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Dividend Anamika Bisht Doon Business School


A-La-Carte Recap Relevance theory Walters model Gordons model Other theories Types of dividend Determinants of dividend policies


Recap Dividend – periodic cash payment At the discrition of board of directors Irrelevance of dividend MM approach Residual theory

Relevance Theory :

Relevance Theory Active variable in determining the value of the firm Dividends – Basic expectation of investors Reduce investors uncertainity Direct relationship between firms dividend policy and its market price

Walter`s Model:

Walter`s Model Attributed to Walter J.E Optimum dividend policy is determined by return on investment and cost of capital If IRR>CC firm will retain earnings (growth firms) If CC>IRR firm will pay dividend (declining firms) If CC=IRR firm can retain or invest the earnings (normal firms)


Assumptions All investment proposal are to be financed by retained earnings The firm has infinite life Additional investment- cost of capital and IRR remain constant All earnings are distributed or invested

Gordons Growth Model:

Gordons Growth Model Favour of relevance theory Value of a share reflects future value of dividend Investors have preference for current dividends- “bird in hand....... approach“ Dividends are more important than capital gains

Assumption :

Assumption Firm is all equity firm Only source of finance is retained earnings Future annual growth rate is assumed to be constant Cost of capital is always greater than the growth rate Company has perpectual life Corporate tax do not exists

Other theories:

Other theories 100% payout theory (Rubner-1966) 100% retention theory (Carklson and Elliot-1969) Investor rationality theory(Shefrin and Statman-1984)

Forms of dividend:

Forms of dividend Interim Dividend Final Dividend Dividend on preference share

Dividend policy:

Dividend policy Distribution of net cash flow Division between distribution and retention Retained earnings are most significant source of funds Dividends – cash belonging to shareholder

Determinants :

Determinants Firms transaction costs Personal taxation Dividend clientele Dividend payout ratio Liquidity Rate of expansion Rate of return Stability of earnings

Cont.... :

Cont.... Legal provisions Contractual constraints Cost of financing Degree of control over the firm State of economy

Thank You:

Thank You