Financial Management

Subrata Halder Dividend Policy

NI = Net Income
DPS = Dividend Per Share
EPS = Earning Per Share
PD = Preference Dividend
DDP = Dividend Declared & Paid
D/P Ratio = Dividend Payout Ratio
P = Market Price Per Share
= Face Value Per Share
= Selling Price Per Share
V = Value of the Firm.
NS = No of Shares Outstanding
g = Growth Rate
b = Retention Ratio
r = Returns on Investment (ROI)
= Internal Rate of Return (IRR)
Ke = Cost of Equity
ROA = Return on Assets
TA = Total Assets
= Common Stock +Pref. Stock Value



NS =



EPS =

DPS =

= EPS D/P Ratio
= EPS (1 Retention Ratio)
D/P Ratio =

100
D/P Ratio + Retention Ratio = 1
Or, D/P Ratio = 1 Retention Ratio
Or, Retention Ratio = 1 D/P Ratio
R/E Reinvestment = NI PD DDP
= (NI PD) b
P/E Ratio =

Maximum DPS =

Ke =
1
\
100
Or, P \E Ratio =
1

100
r =

100 Or, Use the formula of Walter Model

g = b r
Optimum Dividend Payout Ratio:
1. When r > Ke, the firm is in growing situation. So, the optimum payout ratio is 0%
2. When r < Ke, the firm is in declining situation. So, the optimum payout ratio is 100%.
3. When r = Ke, the value of the firm isnt affected whether it pays dividend or not.
Financial Management
Subrata Halder Dividend Policy


























Walter Model:
P =
+()

Gordon Model :
P =
(1)

P = Market Price Per Share
D = Dividend Paid Per Share
E = Earning Per Share
r = ROI or IRR
Ke = Equity Capitalization Rate
b = Retention Ratio
E(1-b) = D
MM Model:
1. P
1
= P
0
(1 +Ke) D
1
2. P
0
=
1+1
1+

=

3. n =
(1)
1

4. External Financing = I (E nD
1
)
5. V = nP
0
=
( + )1 +
1 +

6. Capital Gain = P
1
P
0
Note : When dividend is not paid, D
1
= 0.
P
0
=Market price per share at the beginning of the year
P
1
= Market price per share at the end of the year
n = No of shares
n = No of new shares
D
1
=

Dividend paid per share
E = Earnings available or Net Income
I = Investment Required
Ke = Cost of equity
= Equity capitalization rate
= Discount rate
V = Value of the firm
D = E D/P Ratio
= E (1 Retention Ratio)
Ke =
1
\
100
r =

Stock Dividend:
W-1: No of additional shares = No of common stock Percentage of stock dividend
W-2: R/E transfer = No of additional shares Market price per share
New retained earning = Existing R/E R/E transfer
W-3: Additional paid up capital increase:
= No of additional shares (Market price per share Common stock price per share)
New additional paid up capital = Existing + Increase.
W-4: New Common Stock Value = (Existing stock unit + Additional) Common stock per unit
Stock Split : X to Y
No of shares = No of shares outstanding

Price per share = Current price