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Dividend Decisions - Overview (in Hindi)
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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. 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

  9. RELATIONSHIP BETWEEN RETAINED EARN INGS AND GROWTH Suppose, there are two companies, A Ltd & B Ltd, having a capital employed of 50,00.000 in terms of Equity shares of 100 each are earning @ 20%. Both have same capital structure and same ROl but different dividend policy A ltd distribute 100% of its earnings whereas B ltd only 50%. By Heena Malhotra

  10. Now, considering the other things remain same, the position of both the companies during the next year will be: A Ltd. B Ltd. Previous year Earnings Dividend Retained Earnings Current year Existing capital Retained Earnings Total capital employed Earnings@ 20% Hence with the help of above example, it is easy to understand that how retained Previous year 10,00,000 | Earnings 10,00,000 | Dividend 10,00,000 5,00,000 5,00,000 Nil Retained Earnings Current year 50,00,000 | Existing capital 50,00,000 5,00,000 tal capital employed 55,00,000 11,00,000 Nil Retained Earnings 50,00,000 To 10,00,000 | Earnings@ 20% earnings will lead to growth. By Heena Malhotra

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

  12. 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.

  13. 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

  14. 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

  15. (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

  16. (c) Desire of Shareholders: The desire of shareholders (whether they prefer regular income by way of dividend or maximize their wealth by way of gaining on sale of the shares). In this connection it is to be noted that as per the current provisions of the Income Tax Act, 1961, tax on dividend is borne by the corporate as (Dividend Distribution Tax) and shareholders need not pay any tax on income received by way of dividend from domestic companies. To the extent small shareholders who are concerned with regular dividend income or who do not form a dominant group or retired and old people investing their savings, pension to purchase shares may prefer regular income and hence select shares of companies paying regular and liberal dividend By Heena Malhotra

  17. 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

  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

  19. (iii) Small Constant Dividend per Share plus Extra Dividend: o Some companies follow a policy of paying constant lo dividend per share plus an extra dividend in the yea of high profits. Such a policy is most suitable to the firm having fluctuating earnings form year to year. By Heena Malhotra