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Dividend Policy

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Kinnari vora Pooja palande 1334 Ruta patel
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Dividend Policy: factors affecting dividend policy and dividend decision models.

Kinnari vora Pooja palande 1334 Ruta patel

Dividend Policy: factors affecting dividend policy and dividend decision models.

Dividend A dividend is a distribution to shareholders out of profit or reserve available for this purpose.- Institute of Chartered Accountants of India

Dividend refers to the corporate net profits distributed among share holders.

Types of dividend Final dividendInterim dividendPreference dividend

Dividend policyDividend policy involves decision to payout earnings or to retain them for re investment.Dividend policy of a firm determines what preparation earnings is paid to shareholders by way of dividend and what preportion is poughed back in the firm for re investment purpose.

Factors Determining the dividend policy

Dividend Payout ratio:

Dividend Stability :

Constant dividend per shareConstant dividend per shareConstant dividend per share plus extra dividend

3. Legal contractual and Internal constraints and restriction:

Legal requirement: legal stipulation do not requires a dividend declaration but they specify the condition under which dividends must be paid such condition pertain to-Capital impairment Net profitsInsolvency

B) Contractual Requirements:

C) Internal constrain:

Liquid assetGrowth prospectsFinancial requirement Availability of funds Earning stability and control

4. Owners Consideration: the dividend policy is also affected by the owners consideration of Their opportunity of investmentThe dilution of ownership

5. Capital market consideration

6. Inflation

Dividend decision model

Walters model Prof. James E Walter argued that in the long-run the share prices reflect only the present value of expected dividends. Retentions influence stock price only through their effect on future dividends. Walter has formulated this and used the dividend to optimize the wealth of the equity shareholders.

Assumption Constant EPS and DPSIRR and cost of capital also are also constantInternal financing The firm has very long life financing through retained earnings.

Gordon Growth Model According to Prof. Gordon, Dividend Policy almost always affects the value of the firm. He Showed how dividend policy can be used to maximize the wealth of the shareholders.The main proposition of the model is that the value of a share reflects the value of the future dividends accruing to that share. Hence, the dividend payment and its growth are relevant in valuation of shares.The model holds that the shares market price is equal to the sum of shares discounted future dividend payment.

AssumptionAll equity firmNo external FinancingConstant ReturnsConstant Cost of CapitalPerpetual EarningsNo taxesConstant RetentionCost of Capital is greater then growth rate (k>br=g)

Modigliani and Millers Model The price of a company is determined by its earnings potentiality and investment policy and not by the pattern of income distribution.

Assumption Capital markets are perfect No transaction costFixed investment policy No taxRisk does not exist.


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