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DividendanddeterminantsofDividendPolicy

Dividend

Dividendreferstothecorporatenetprofitsdistributedamongshareholders.Dividendscanbebothpreferencedividendsandequitydividends.Preferencedividendsarefixeddividendspaidasapercentageeveryyeartothepreferenceshareholdersifnetearningsarepositive.Afterthepaymentofpreferencedividends,theremainingnetprofitsarepaidorretainedorbothdependinguponthedecisiontakenbythemanagement.

DeterminantsofDividendPolicy

Themaindeterminantsofdividendpolicyofafirmcanbeclassifiedinto:DividendpayoutratioStabilityofdividendsLegal,contractualandinternalconstraintsandrestrictionsOwner'sconsiderationsCapitalmarketconsiderationsandInflation.

Dividendpayoutratio

Dividendpayoutratioreferstothepercentageshareofthenetearningsdistributedtotheshareholdersasdividends.Dividendpolicyinvolvesthedecisiontopayoutearningsortoretainthemforreinvestmentinthefirm.Theretainedearningsconstituteasourceoffinance.Theoptimumdividendpolicyshouldstrikeabalancebetweencurrentdividendsandfuturegrowthwhichmaximizesthepriceofthefirm'sshares.Thedividendpayoutratioofafirmshouldbedeterminedwithreferencetotwobasicobjectivesmaximizingthewealthofthefirmsownersandprovidingsufficientfundstofinancegrowth.Theseobjectivesareinterrela

ted.Stabilityofdividends

Dividendstabilityreferstothepaymentofacertainminimumamountofdividendregularly.Thestabilityofdividendscantakeanyofthefollowingthreeforms:constantdividendpershareconstantdividendpayoutratioorconstantdividendpershareplusextradividendLegal,contractualandinternalconstraintsandrestrictions

Legalstipulationsdonotrequireadividenddeclarationbuttheyspecifytheconditionsunderwhichdividendsmustbepaid.Suchconditionspertaintocapitalimpairment,netprofitsandinsolvency.Importantcontractualrestrictionsmaybeacceptedbythecompanyregardingpaymentofdividendswhenthecompanyobtainsexternalfunds.Theserestrictionsmaycausethefirmtorestrictthepaymentofcashdividendsuntilacertainlevelofearningshasbeenachievedorlimittheamountofdividendspaidtoacertainamountorpercentageofearnings.Internalconstraintsareuniquetoafirmandincludeliquidassets,growthprospects

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,financialrequirements,availabilityoffunds,earningsstabilityandcontrol.Owner'sconsiderations

Thedividendpolicyisalsolikelytobeaffectedbytheowner'sconsiderationsofthetaxstatusoftheshareholders,theiropportunitiesofinvestmentandthedilutionofownership.Capitalmarketconsiderations

Theextenttowhichthefirmhasaccesstothecapitalmarkets,alsoaffectsthedividendpolicy.Incasethefirmhaseasyaccesstothecapitalmarket,itcanfollowaliberaldividendpolicy.Ifthefirmhasonlylimitedaccesstocapitalmarkets,itislikelytoadoptalowdividendpayoutratio.Suchcompaniesrelyonretainedearningsasamajorsourceoffinancingforfuturegrowth.Inflation

Withrisingpricesduetoinflation,thefundsgeneratedfromdepreciationmaynotbesufficienttoreplaceobsoleteequipmentsandmachinery.So,theymayhavetorelyuponretainedearningsasasourceoffundtoreplacethoseassets.Thus,inflationaffectsdividendpayoutratiointhenegativeside.

2a,bonusshare

Freesharesofstockgiventocurrentshareholders,baseduponthenumberofsharesthatashareholderowns.Whilethisstockactionincreasesthenumberofsharesowned,itdoesnotincreasethetotalvalue.Thisisduetothefactthatsincethetotalnumberofsharesincreases,theratioofnumberofsharesheldtonumberofsharesoutstandingremainsconstant.

2b,sharesplitStockholding&Investmentsnumericalincreaseofshareswithoutaffectingtotalvalueanactofissuingstockholderswithatleastonemoreshareforeveryshareowned,withoutaffectingthetotalvalueofeachholding.Asharesplitusuallyoccursbecausethestockpricehasbecometoohighforeasytrading.

3,rationalityMentalstateofarationalpersoncharacterizedby(1)beliefsthatarecoherent

(notcontradictory)andcompatiblewiththeperson'sexperiencewithinagivencontext,(2)purposeful(intendedtoproducecertainresults)behaviorguidedbymeansversusendsanalysis,(3)decisionmakingbasedoncost-versus-benefit(painversusgain)evaluation,and(3)anoveralloptimizationapproach(utilitymaximization)expressedinattemptstomaximizeadvantagesorgainsandtominimizedisadvantagesorlosses.SeealsoBoundedRationality.

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4DETERMINANTSOFWORKINGCAPITALTherearelotsoffactorofdeterminantsofworkingcapital1)Natureofbusiness-workingcapitalrequirementofafirmbasicallyinfluencedbythenatureofitsbusinesstradingandfinancialformshaveaverysmallinvestmentinfixedassets,butrequirealargesumofmoneytobeinvestedinworkingcapital.Retailsstores,forexamplemustcarrylargestockofaverityofgoodtosatisfyvariedandcontinuousdemandoftheircustomer.2)Marketanddemandcondition-theworkingcompanyrelatedtoitssales.Itisdifficulttopreciselydeterminetherelationshipbetweenthevolumeofsalesandworkingcapitalneed.Currentassetswillhavetobeemployedbeforegrowthtakesplace.Thennecessarytomakeplanningofworkingcapitalforagrowingfirmonacontinuousbasis3)Technologyandmanufacturingpolicy-themanufacturingcyclecompriseofthepurchaseanduseofrawmaterialandtheproductionoffinishedgoods.Longerthemanufacturecycle,largerwillbethefirm'sworkingcapitalrequirement.Forexample,themanufacturingcycleinthecaseofaboiler,dependingonitssize,mayrangebetweensixtotwentyfourmonth.Ontheotherhandthemanufacturingcycleofproductsuchasdetergentpowder,soap,icecreamsetc.Maybeafewhourextendproducttakealargetime

4)Creditpolicyofthefirmaffecttheworkingcapitalbyinfluencingthelevelofdebtor.Thecredittermtobeguaranteedtocustomermaydependuponthenormoftheindustrytowhichthefirmbelong.Butafirmhastheflexibilityofshapingitscreditpolicywithintheconstraintofindustrynormsandpractice.Thefirmshouldusediscretioningrantingcredittermtouscustomer5)Operatingefficiency-theoperatingefficiencyofthefirmrelatestotheoptimumutilizationofallitsresourceatminimumcosts.Theefficiencyincontrollingoperatingcostandutilizingfixedandcurrentassetsleadstooperatingefficiency.Theuseofworkingcapitalisimprovedandpaceofcashconversioncycleisacceleratedwithoperatingefficiency.Betterutilizationimprovesprofitabilityandhelpsthereleasingonworkingcapital6)Conditionsofsupply:Theinventoryofrawmaterial,sparesandstoresdependsontheconditionsofsupply.Ifthesupplyispromptandadequate,thefirmca

nmanagewithsmallinventory.However,ifthesupplyisunpredictableandscantthenthefirm,toensurecontinuityofproduction,asimilarpolicymayhavetobefollowedwhentherawmaterialisavailableonlyseasonallyandproductionoperationsarecarriedoutroundtheyear

5a,leasing

lease:Awrittenagreementunderwhichapropertyownerallowsatenanttousethepropertyforaspecifiedperiodoftimeandrent.

5b,hirepurchaseAsystembywhichabuyerpaysforathinginregularinstallmentswhileenjoyingtheuseofit.Duringtherepaymentperiod,ownership(title)oftheitemdoesnotpasstothebuyer.Uponthefullpaymentoftheloan,thetitlepassestothebuyer.UKterm;theusualUStermisinstallmentbuying.

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5c,venturecapitalVC.Fundsmadeavailableforstartupfirmsandsmallbusinesseswithexceptionalgrowthpotential.Managerialandtechnicalexpertiseareoftenalsoprovided.alsocalledriskcapital.

5d,privateequityEquitysecuritiesofcompaniesthatarenotlistedonapublicexchange.Transferofprivateequityisstrictlyregulated;therefore,anyinvestorlookingtosellhis/herstakeinaprivatecompanyhastofindabuyerintheabsenceofamarketplace.Returnsonprivateequitygenerallyoccurinthreeways:amergerorsale,aninitialpublicoffering,orarecapitalization.