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Determinants of Dividend Decisions (in Hindi)
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Heena Malhotra
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  1. Dividend Decisions By Heena Malhotra

  2. Financing Decision Financial Decision Investment Decision Theories 1. M. M. Hypothesis 2. Walter Model 3. Gordon Model 4. Traditional theory 5. Linter Model Dividend Decision By Heena Malhotra

  3. MEANING OF DIVIDEND Dividend is that part of profit after tax which is distributed to the shareholders of the company. In other words, the profit earned by a company after paying taxes can be used for: i. ii. Distribution of dividend or Can be retained as surplus for future growth Distributed Dividend Profit After Tax Retained Earnings Retained By JHeena Malhotra

  4. FORMS OF DIVIDEND Generally, the dividend can take any of the following forms (depending upon some factors will be discussed later): 1. Cash dividend: It is the most common form of dividend. Cash here means cash, cheque, warrant, demand draft, pay order or directly through Electronic Clearing Service (ECS) but not in kind 2. Stock dividend (Bonus Shares): It is distribution of shares in lieu of cash dividend to existing shareholders. When the company issues further shares to its existing shareholders without consideration it is called bonus shares. Such shares are distributed proportionately thereby retaining proportionate ownership of the company. If a shareholder owns 100 shares at a time, when 10% dividend is declared he will have 10 additional shares thereby increasing the equity share capital and reducing reserves and surplus (retained earnings). The total net worth is not affected by bonus issue. By Heena Malhotra

  5. Advantages of Stock Dividend There are many advantages both to the shareholders and to the company. Some of the important ones are listed as under: (1) To Share Holders: (a) Tax benefit-At present there is no tax on dividend received. (b) Policy of paying fixed dividend per share and its continuation even after declaration of stock dividend will increase total cash dividend of the shareholders in future. (2) To Company. (a) Conservation of cash for meeting profitable investment opportunities (b) Cash deficiency and restrictions imposed bylenders to pay cash dividend. By Heena Malhotra

  6. Limitations of Stock Dividend Limitations of stock dividend to shareholders and to company are as follows: 1. To Shareholders: Stock dividend does not affect the wealth of shareholders and therefore it has no value for them. This is because the declaration of stock dividend is a method of capitalising the past earnings of the shareholders and is a formal way of recognising earnings which the shareholders already own. It merely divides the company's ownership into a large number of share certificates. James Porterfield regards stock dividends as a division of corporate pie into a larger number of pieces. Stock dividend does not give any extra or special benefit to the shareholder. His proportionate ownership in the company does not change at all. Stock dividend creates a favourable psychological impact on the shareholders and is greeted by them on the ground that it gives an indication of the company's growth. By Heena Malhotra

  7. o 2" To company: Stock dividends are more costly to administer than cash dividend o Also, companies have to pay tax on distribution. By Heena Malhotra

  8. Growth (g) br where, g growth rate of the firm b retention ratio r rate of return on investment By Heena Malhotra

  9. DETERMINANTS OF DECISIONS The dividend policy is affected by the following factors: 1. Availability of funds: If the business is in requirement of funds, then retained earnings could be a good source. Since it saves the floatation cost and further the control will not be diluted as in case of further issue of share capital 2. Cost of capital: If the financing requirements can be financed through debt (relatively cheaper source of finance), then it should be preferred to distribute more dividend but if the financing is to be done through fresh issue of equity shares, it is better to use retained earnings as much as possible. 3. Capital structure: An optimum Debt equity ratio should also be under consideration for the dividend decision. Stock price: Stock price here means market price of the shares. Generally, higher dividends increase value of shares and low dividends decrease-itena Malhotra 4.

  10. 5. Investment opportunities in hand: The dividend decision is also affected, if there are investment opportunities in hand, the company may prefer to retain more from the earnings retained earnings, it's better to distribute the earnings as much as possible. income, hence in such cases, the firm will have to pay dividend for survival 6. Internal rate of return: If the internal rate of return is more than the cost of 7. Trend of industry: Few industries have been seen by investors for regular 8. Expectation of shareholders: The shareholders can be categorised in two categories: (i) those who invests for regular income, & (ii) those who invests for growth. Generally, the investor prefers current dividend more than the future By Heena Malhotra growth.

  11. 9. Legal constraints: Section 123 of the Companies Act, 2013 came into force from 1st April, 2014 which provides for declaration of dividend. According to this section: (0) Dividend shall be declared or paid by a company for any financial year only: (a) out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of section 123(2), or (b) out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of that sub-section and remaining undistributed, or (c) out of both; or (d) out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government. By Heena Malhotra

  12. 10.Taxation: As per Section 115-0, dividend is subject to dividend distribution tax (DDT in the hands of the company. Under the existing provisions of Section 1034) of the Income Tax Act, 1961, dividend which suffer dividend distribution tax (DDT) under section 115-0 is exempt in the hands of the shareholder. Further, any income by way of dividend in excess of F 10 lakhs shallbe chargeable to tax in the case of an individual, HUF or a firm who is resident in India, at the rate of ten percent. By Heena Malhotra

  13. Mature Companies Growth Companies 1. Mature companies having few1. Growth companies, on the other investment opportunities will showhand, have low payout ratios. They are in need of funds to finance fast high payout ratios; growing fixed assets. Share prices of such companies are 2. sensitive to dividend charges. 2. Distribution of earnings reduces the funds of the company. They retain all the earnings and declare bonus shares to offset the dividend requirements of the shareholders 3. So a small portion of the earnings are 3. These companies increase the kept to meet emergent and occasionalamount of dividends gradually as the profitable investment opportunities financial needs. start falling. By Heena Malhotra

  14. (ii) Access to the Capital Market: By paying large dividends, cash position is affected.Ifnew shares have to be issued to raise funds for financing investment programmes and if the existing shareholders cannot buy additional shares, control is diluted. Payment of dividends may be withheld and earnings are utilised for financing firm's investment opportunities. (iv) Investment Opportunities: If investment opportunities are inadequate, it is better to pay dividends and raise external funds whenever necessary for such opportunities. By Heena Malhotra

  15. O The dividend policy, thus pursued by the company should strike a balance on the desires of the shareholders who may belong either of the group as explained above. o Also the dividend policy once established should be continued as long as possible without interfering with the needs of the company to create clientele effect. By Heena Malhotra

  16. (d) Stability of Dividends: Regular payment of dividend annually even if the amount of dividend may fluctuate year to year may not be, related with earnings. (i) Constant Dividend per Share: Irrespective of the fluctuation in earnings, companies may follow the policy of paying a fixed amount per share as dividend every year. If the company reaches new level of earnings and expects to maintain it, the annual dividend per share may be increased EPS and DPS EPS DPS >Time (Years) By Heena Malhdtra

  17. oWith wide fluctuation in the pattern of earnings, it is necessary to build up surplus in years of higher than average earnings to maintain dividends in years of below average income. o This gives rise to the creation of Dividend Equalisation Reserve Fund By Heena Malhotra

  18. ii. Constant Percentage of Net Earnings. o The ratio of dividend to earnings is known as Payout o Some companies follow a policy of constant Payout ratio O The amount of dividend fluctuates in direct proportion to ratio. I.e. paying fixed percentage on net earnings every year. earnings. If a company adopts 40% payout ratio, then 40% of every rupee of net earnings will be paid out. If a company earns Rs. 2/- per share, dividend per share will be 80 paise and if it earns Rs. 1.50 per share, dividend per share will be 60 paise. By Heena Malhotra