1. Presented byDharmender kumar

2. Dividend Policy refers to the explicit or implicit decision ofthe Board of Directors regarding the amount of residualearnings (past or present) that should be distributed tothe shareholders of the corporation. This decision is considered a financing decision becausethe profits of the corporation are an important source offinancing available to the firm. 3. Firm has 2 choices Pay dividend Reinvest funds instead of paying out 4. In the absence of dividends, corporate earnings accrue to the benefit ofshareholders as retained earnings and are automatically reinvested inthe firm. When a cash dividend is declared, those funds leave the firmpermanently and irreversibly. Distribution of earnings as dividends may starve the company of fundsrequired for growth and expansion, and this may cause the firm to seekadditional external capital.Retained EarningsCorporate Profits After TaxDividends 5. There is no legal obligation for firms to pay dividends tocommon shareholders Shareholders cannot force a Board of Directors todeclare a dividend, and courts will not interfere with theBODs right to make the dividend decision. 6. THEORY OF IRRELEVANCE1. Residual approach2. Miller and Modgilani approach THEORY OF RELEVANCE 1. Walters approach 2. Gorden approach 7. Dividendirrelevance theory is one of themajor theories concerning dividend policyin an enterprise. It was first developed byFranco Modigliani and Merton Miller in afamous seminal paper in1961. The authors claimed that neither the priceof firms stock nor its cost of capital areaffected by its dividend policy. This theory contain two theories. 8. Accordingto M-M, under a perfect market situation, the dividend policy of a firm is irrelevant, as it does not affect the value of the firm. 9. Dividend received at the end of the yearD1 P1Market priceP0 of share at the (1 Ke ) end of yearMarket priceof the share atthe beginningCost of equityof period 10. Market priceDividendof the share at received atthe beginning the end of theof period yearP1 P 0(1 ke) D1Market priceof share at the Cost of equityend of year 11. Market total earningInvestmentof the firmNumber ofrequireshares which Dividend received at the end of the year I ( E nD1) mP1 Number of sharesMarket price outstanding at theof share at the beginning of theend of year period 12. Investment Market price requireMarket totalValue of the of share at theearning of thefirm end of yearfirm(n m) P1 ( I E ) mP0Cost of (1 Ke )equityNumber ofNumber of sharesshare issueoutstanding at the beginning of the period 13. There is perfect capital market investor are rational Information about company is freelyavailable there is no transaction cost No investor is large enough to effect there are no taxes 14. o According to relevant theory payment of dividendaffect the firms stock and its cost of capital. thistheory is based on rate of interest and cost of capital. 15. Waltersmodel supports the principle that dividends are relevant. The investment policy of a firm cannot be separated from its dividend policy and both are inter-related. The choice of an appropriate dividend policy affects the value of an enterprise. 16. Price of equitydividend D PExpected Ke g growth rate ofearningdividendCost of equity 17. market priceper share Earning per share r ( E D) / ke P D KeInternal rate ofCost of equityreturncapital 18. The investment of the firm are financed through internal financing or retain earning only. Rate of interest and cost of equity are constant. Earning & dividend dont change while determining the value of the firm. Firm has very long life. 19. If r>k than firm retain the whole incomeIf r ke, the value of shares is inversely related tothe D/P ratio. As the D/P ratio increases, the marketvalue of shares decline. Its value is the highest whenD/P ratio is 0. So, if the firm retains its earningsentirely, it will maximize the market value of the shares.The optimum payout ratio is zero. When r < ke, the D/P ratio and the value of shares arepositively correlated. As the D/P ratio increases, themarket price of the shares also increases. Theoptimum payout ratio is 100%. When r = ke, the market value of shares is constantirrespective of the D/P ratio. In this case, there is nooptimum D/P ratio. 21. A model for determining the intrinsic value of a stock,based on a future series of dividends that grow at aconstant rate. Given a dividend per share that is payablein one year, and the assumption that the dividend growsat a constant rate in perpetuity, the model solves for thepresent value of the infinite series of future dividends.Gordons theory contends that dividends are relevant.This model is of the view that dividend policy of a firmaffects its value. According to Gordon, the market value of a share isequal to the present value of the future streams ofdividends means (ke = g) 22. D P KegWhere:D = Expected dividend per share one yearfrom nowk = Required rate of return for equityinvestorG = Growth rate in dividends (in perpetuity) 23. Assumptions of this model The firm is an all equity firm. No external financing isused and investment programmes are financedexclusively by retained earnings. Return on investment( r ) and Cost of equity(Ke) areconstant. The firm has perpetual life. The retention ratio, once decided upon, is constant.Thus, the growth rate, (g ) is also constant. Ke > g 24. THANKS