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8/2/2019 Div Policy Ymt
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8/2/2019 Div Policy Ymt
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Dividend Policy refers to the explicit orimplicit decision of the Board of Directorsregarding the amount of residualearnings (past or present) that should bedistributed to the shareholders of thecorporation.
This decision is considered a financing decisionbecause the profits of the corporation are animportant source of financing available to thefirm.
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CorporatePAT
Retained
earnings
Dividend
policy
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A dividend is a discretionary paymentmade to shareholders
The decision to distribute dividends issolely the responsibility of the board ofdirectors
Shareholders are residual claimants ofthe firm (they have the last, and residualclaim on assets on dissolution and onprofits after all other claims have beenfully satisfied)
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Three different types of dividend:
1. Cash Dividend
most common portion of earnings paid out to shareholders typically on an ongoing basis
2. Stock Dividend give shareholders new shares of stock in lieu of cash
as a dividend
increases the number of shares outstanding same effect as a stock split
3. Special Dividend orStock Repurchase special dividend = a large, one time dividend stock repurchase = distribute cash to shareholders
by firm buying stock
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Declaration Date this is the date on which the Board of Directors meet and
declare the dividend. In their resolution the Board will setthe date of record, the date of payment and the amountof the dividend for each share class.
when CARRIED, this resolution makes the dividend acurrent liability for the firm.
Date of Record
Date, set by the issuing company, on which an individualmust own shares in order to be eligible to receive a declareddividend or capital gains distribution .
is the date on which the shareholders register is closed
after the trading day and all those who are listed willreceive the dividend.
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Ex dividend Date is the date that the value of the firms common shares will reflect
the dividend payment (ie. fall in value) ex means without. At the start of trading on the ex-dividend date, the share price
will normally open for trading at the previous days close, less thevalue of the dividend per share. This reflects the fact thatpurchasers of the stock on the ex-dividend date and beyondWILL NOT receive the declared dividend.
Date of Payment
is the date the cheques for the dividend are mailed out to theshareholders
http://www.sec.gov/answers/dividen.htm
http://www.sec.gov/answers/dividen.htmhttp://www.sec.gov/answers/dividen.htm8/2/2019 Div Policy Ymt
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Declaration Date
The BoardMeetsand passes themotion tocreatethe dividend
Ex Dividend Date is determined
by the Date of Record.The market value of the sharesdrops by the value of the dividendper share on market openingcomparedto the previous days close.
Date ofRecord
2 business days prior to the Date of Record
Date ofPayment
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most common type of dividend
level of dividends often measured by dividend
yield:
dividend yield =
measures % return earned by investor from
dividends alone firms dividend policy can also be measured
by payout ratio:
Dividend payout ratio =
P
D
pricestock
dividendannual
EPS
D
shareperearnings
dividendannual
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Only real effect is to increase number ofshares and dilute the value of each share
A stock split is essentially just a large stock
dividendExample:
Firm has 100,000 shares, each worth $100 Does a 2-for-1 stock split
Doubles number of shares, but does not changeanything about firm There should now be 200,000 shares, each worth
$50 No difference to shareholders
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Firms with large amounts of excess cashsometimes pay out large dividends
Firms are normally very explicit about thelarge dividend being a special dividend
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Gordon's Growth Model Walters valuation model
Dividend policy is relevant and canaffect the value of share and firm.
Bird in hand is worth two.
Investors value the firm more whenthey get dividend.
Considers that investment anddividend decision of a firm areinterrelated.
A firm should or should not pay
dividends depends upon whether ithas got suitable investmentopportunities to invest retainedearnings .
r > ke, payout ratio= 0
r
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Gordon's Growth Model Walters valuation model
Assumption:
1) g= br
2) Ke> g
Assumptions
1) All investment proposals arefinanced through retained earnings
and no external finance is availableto the firm.
2)Ke and r are constant.
3)Firm has infinite life.
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Gordon's Growth Model Walters valuation model
Po = E1(1-b)Ke- br
P = D + r(E-D)/ke
Ke
Where
Po = current ex-dividend market priceof equity share
E1 = expected earning per share
b = retention ratio
1-b = dividend payout ratio
Ke = cost of capital
br = g = growth rate of dividend
Where
P = current market price of share
E = earning per share
D = dividend per share
E- D = retained earning per share
r= return on firms investment
K = cost of equity capital
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Following information is available inrespect of ABC Ltd.
EPS: Rs. 10, Ke: 0.1 Find out the market price of share under
different rate of return r= 8%, 10% & 15%
for different payout ratios of 0, 4, 8 & 10.
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Following information is available inrespect of XYZ Ltd.
EPS: Rs. 10, Ke: 0.1 Find out the market price of share under
different rate of return r= 8%, 10% & 15%
for different payout ratios of 0%, 40%, 80%& 100%.
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