the dividend decision

8/7/2019 The dividend decision

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DIVIDENDDIVIDEND

DECISIONSDECISIONS BILAL MALICK BILAL MALICKRAHUL MRAHUL M

RAMAKRISHNAN GRAMAKRISHNAN GSAIRAMSAIRAM

SHUBBRAMANIANSHUBBRAMANIAN


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Meaning:Meaning:Dividend decision relates to the amountDividend decision relates to the amountand timing of any cash payments madeand timing of any cash payments madeto the company's stockholders.to the company's stockholders.

The decision is an important one forThe decision is an important one forthe firm as it may influence its capitalthe firm as it may influence its capitalstructure and stock price.structure and stock price.

The decision may determine the amountThe decision may determine the amountof taxation that stockholders pay.of taxation that stockholders pay.


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Main factors that may influence aMain factors that may influence a

firm's dividend decision:firm's dividend decision:

FreeFree--cash flowcash flowtheorytheory

Clients ofClients ofdividenddividend

InformationInformationsignalingsignaling


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Free cash flow theory:Free cash flow theory:Under this theory, the dividend decisionUnder this theory, the dividend decisionis very simple.is very simple.

The firm simply pays out, as dividends,The firm simply pays out, as dividends,any cash that is surplus after it investsany cash that is surplus after it invests

in all available positive net presentin all available positive net presentvalues projects.values projects.


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Clients of dividend:Clients of dividend:A retiree may prefer to invest in a firm thatA retiree may prefer to invest in a firm thatprovides a consistently high dividend yield,provides a consistently high dividend yield,whereas a person with a high income fromwhereas a person with a high income from

employment may prefer to avoid dividends dueemployment may prefer to avoid dividends dueto their high marginal tax rate on income.to their high marginal tax rate on income.

If clients exist for particular patterns ofIf clients exist for particular patterns of

dividend payments, a firm may be able todividend payments, a firm may be able tomaximize its stock price and minimize its costmaximize its stock price and minimize its costof capital by catering to a particular client.of capital by catering to a particular client.


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Forms of DividendForms of Dividend

Scrip DividendScrip Dividend- - An unusual type ofAn unusual type ofdividend involving the distribution ofdividend involving the distribution ofpromissory notes that calls for somepromissory notes that calls for some

type of payment at a future date.type of payment at a future date.Bo nd DividendBo nd Dividend- - A type of liabilityA type of liabilitydividend paid in the dividend payer'sdividend paid in the dividend payer'sbonds.bonds.P ro perty DividendP ro perty Dividend- - A stockholderA stockholderdividend paid in a form other than cash,dividend paid in a form other than cash,scrip, or the firm's own stock.scrip, or the firm's own stock.


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Cash DividendCash Dividend- - A dividend paid in cashA dividend paid in cashto a company's shareholders , normallyto a company's shareholders , normallyout of the its current earnings orout of the its current earnings oraccumulated profits.accumulated profits.

O pti o n al DividendO pti o n al Dividend- - Dividend which theDividend which theshareholder can choose to take asshareholder can choose to take aseither cash or stock.either cash or stock.


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Retained earnings helps the firm toRetained earnings helps the firm toconcentrate on the growth, expansion andconcentrate on the growth, expansion andmodernization of the firm.modernization of the firm.

To sum upTo sum up,, to a large extentto a large extent it affectsit affects thethefinancial structure, flow of funds, corporatefinancial structure, flow of funds, corporateliquidity, stock prices, and growth of theliquidity, stock prices, and growth of thecompany and investor's satisfaction.company and investor's satisfaction.

The market price gets affected if dividendsThe market price gets affected if dividendspaid are less.paid are less.


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Factors influencing theFactors influencing thedividend decisiondividend decision

Stability of earningsStability of earnings

Age of CorporationAge of Corporation

Liquidity of fundsLiquidity of funds

Extent of share distributionExtent of share distribution

Needs for additional capitalNeeds for additional capital


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Trade cyclesTrade cycles

Government PoliciesGovernment Policies

Taxation policyTaxation policy

LegalLegal requirementsrequirementsPast dividend ratesPast dividend rates


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Ability to borrowAbility to borrow

Policy of controlPolicy of control

Repayment of loanRepayment of loan

Time for payment of dividendTime for payment of dividend

Regularity and stability in dividend paymentRegularity and stability in dividend payment


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The dividend decision is usually takenThe dividend decision is usually takenby considering at least the threeby considering at least the three

questions of:questions of:1.1.HowHow much excess cash ismuch excess cash is available?available?

2.What2.What do our investors preferdo our investors prefer? ?3.What3.What will be the effect on our stockwill be the effect on our stockpriceprice onon announcing the amount of theannouncing the amount of the

dividenddividend??


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the dividend decision

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