DIVIDEND DECISIONS

Dividend is the portion of earnings which is

Distributed among the shareholders.

Dividend policy determines the division of

Earnings between payment to shareholders

& retained earnings.

Dividend policy may be viewed as:

1. Long term financing decision

2. Wealth maximisation decision

Determinants of dividend policy.

• Transaction cost• Personal taxation• Dividend clientele• Dividend payout ratio• Divisible profits• Liquidity• Rate of expansion• Rate of return

• Legal provisions

• Stability of earnings

• Contractual constraints

• Cost of financing

• Degree of control

• Capital Market access

• State of economy

• Effect of trade cycles

• Policy of competitive concerns

Dividend policies

1. Constant dividend payout ratio.

2. Constant dividend rate policy :- (dividend equalisation fund/reserve)

a. constant dividend per share

b. constant divided plus extra dividend

c. uniform cash dividend plus bonus shares

d. Fixed percentage of market value

Types of dividends

1. Cash dividends

2. Dividend warrants

3. Bond dividends

4. Property dividends

5. Stock dividends/bonus shares

STOCK DIVIDENDS/BONUS SHARES• Making partly paid equity shares fully paid up• Issuing fresh equity shares to existing shares

objectives-1. Conservation of cash2. Lower rate of dividends for undercapitalisation3. Financing expansion programme4. Transferring the surplus reserves5. Enhance prestige6. Widening share market7. True presentation of earning capicity.

advantages to company-

• Liquidity position

• Shareholders satisfaction

• Reduced cost of capitalisation

• Remedy for undercapitalisation

• Enhance prestige

• Widening share market

• Finance for expansion

• Conservation of control

Advantages- to investors

• Increase in their equity

• Marketability of shares is increased

• Increase in income

• Increases demand for shares

Disadvantages for company1. Increase in capitalisation

2. More liability of dividends

3. Prevents new investors

4. Control of management is diluted

For investors1. Loss of cash dividends

2. Lowers the market value of share