Académique Documents
Professionnel Documents
Culture Documents
POLICY
By :
Pooja Narwani
Pratik Lalani
Razaali Vakil
Richa Shah
Riddhi Salot
Introduction
:
What is Dividend?
What is dividend policy?
Theories of Dividend Policy
Relevant Theory
Walter’sModel
Gordon’s Model
Irrelevant Theory
M-M’s Approach
Traditional Approach
What is Dividend?
Bond Dividend
Property Dividend
Composite Dividend
Cont
d.
Special Dividend
What is Dividend
Policy :
Regularity
Requirements of Institutional Investors
Dimensions of Dividend
Policy
Pay-out Ratio
Funds requirement
Liquidity
Shareholder preference
Taxes
Cont
d.
Stability
Stable dividend payout Ratio
Stable Dividends or Steadily changing
Dividends
Types of Dividend
Policy
Regular Dividend Policy
Stable Dividend Policy
Constant dividend per share
Constant pay out ratio
Irrelevance Theories
Relevance Theories
(i.e. which consider dividend
(i.e. which consider dividend
decision to be irrelevant as it
decision to be relevant as it
does not affects the value of the
affects the value of the firm)
firm)
Walter’s Gordon’s
Model Model
Infinite time
Formula of Walter’s Model
D + r (E-D)
P = k
k
Where,
P = Current Market Price of equity share
E = Earning per share
D = Dividend per share
(E-D) = Retained earning per share
r = Rate of Return on firm’s investment or Internal Rate of
Return
k = Cost of Equity Capital
Illustration
:
Growth Firm (r > k):
r = 20% k = 15% E = Rs. 4
If D = Rs. 4
P = 4+(0) 0.20 /0 .15 = Rs. 26.67
0.15
If D = Rs. 2
P = 2+(2) 0.20 / 0.15 = Rs. 31.11
0.15
Illustration
:
Normal Firm (r = k):
r = 15% k = 15% E = Rs. 4
If D = Rs. 4
P = 4+(0) 0.15 / 0.15 = Rs. 26.67
0.15
If D = Rs. 2
P = 2+(2) 0.15 / 0.15 = Rs. 26.67
0.15
Illustration
:
Declining Firm (r < k):
r = 10% k = 15% E = Rs. 4
If D = Rs. 4
P = 4+(0) 0.10 / 0.15 = Rs. 26.67
0.15
If D = Rs. 2
P = 2+(2) 0.10 / 0.15 = Rs. 22.22
0.15
Effect of Dividend Policy on Value of
Share
Case If Dividend Payout If Dividend Payout
ratio Increases Ration decreases
Constant Returns
Perpetual Earnings
No taxes
Constant Retention
Where,
P = Price
E = Earning per Share
b = Retention Ratio
k = Cost of Capital
br = g = Growth Rate
Illustration
:
Growth Firm (r > k):
r = 20% k = 15% E = Rs. 4
If b = 0.25
P0 = (0.75) 4 = Rs. 30
0.15- (0.25)(0.20)
If b = 0.50
P0 = (0.50) 4 = Rs. 40
0.15- (0.5)(0.20)
Illustration
:
Normal Firm (r = k):
r = 15% k = 15% E = Rs. 4
If b = 0.25
P0 = (0.75) 4 = Rs. 26.67
0.15- (0.25)(0.15)
If b = 0.50
P0 = (0.50) 4 = Rs. 26.67
0.15- (0.5)(0.15)
Illustration
:
Declining Firm (r < k):
r = 10% k = 15% E = Rs. 4
If b = 0.25
P0 = (0.75) 4 = Rs. 24
0.15- (0.25)(0.10)
If b = 0.50
P0 = (0.50) 4 = Rs. 20
0.15- (0.5)(0.10)
Criticisms of Gordon’s
model
As the assumptions of Walter’s Model
and Gordon’s Model are same so the
Gordon’s model suffers from the same
limitations as the Walter’s Model.
Modigliani & Miller’s Irrelevance
Model
Depends on
Firm’s Earnings
Depends on
Where,
Po = Market price per share at time 0,
D1 = Dividend per share at time 1,
P1 = Market price of share at time 1
1 (nD1+nP1)
nPo =
(1 + p)
Google
Financial management by prasanna
chandra.