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Stability of dividend - Practical Considerations in Dividend Policy (in Hindi)
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Vikas Gupta
9 months ago
Very nice video Mam thanku very much
  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. PRACTICAL CONSIDERATIONS IN DIVIDEND POLICY (a) Financial Needs of The Company: Retained earnings can be a source of finance for creating profitable investment opportunities. By Heena Malhotra

  4. (b) Constraints on Paying Dividends (0) Legal: Under Section 123 of the Companies Act 2013, 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 Out of the profits of the company for any previous financial year or years arrived at piding for depreciation in accordance with the provisions of that sub-section and remaining undistributed, or Out of both; or 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 b) c) d) By Heena Malhotra

  5. () Liquidity. Payment of dividends means outflow of cash.Ability to pay dividends depends on cash and liquidity position of the firm. A mature company does not have much investment opportunities, nor are funds tied up in permanent working capital and, therefore has a sound cash position. For a growth oriented company in spite of good profits, it will need funds for expanding activities and permanent working capital and therefore it is not in a position to declare dividends. By Heena Malhotra

  6. (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

  7. (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

  8. (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

  9. 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

  10. 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

  11. (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

  12. Modigliani and Miller (M.M) HYPOTHESIS o Modigliani - Miller theory was proposed by Franco Modigliani and Merton Miller in 1961. o MM approach is in support of the irrelevance of dividends i.e. firm's dividend policy has no effect on its value of assets. By Heena Malhotra

  13. 6saleHt mawieRendg eSvihatheeesout of new issue of equity shares. I(E-nD1) OME P1 1+Ke By Heena Malhotra

  14. o MM Hypothesis can be explained in another form also presuming thot investmentrequired by the firm on the account of payment of dividends is financed out of new issue of equity shares. I(E-nD1) P1 (n+m)P1-(I-E 1+Ke By Heena Malhotra

  15. Advantages of MM Hypothesis Various advantages of MM Hypothesis are as follows 1. This model is logically consistent. 2. It provides a satisfactory framework on dividend policy with the the concept of Arbitrage process. Limitations of MM Hypothesis Various Limitations of MM Hypothesis are as follows 1. Validity of various assumptions is questionable. 2. This model may not be valid under uncertainty By Heena Malhotra

  16. Irrelevance Theory (Dividend is irrelevant) M.M. Approach Theories of Dividend Walter Model Relevance Theory (Dividend is relevant) Gordon Model By Heena Malhotra