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Dividend and retention

policy
By :
Pooja Narwani
Pratik Lalani
Razaali Vakil
Richa Shah
Riddhi Salot
Introducti
on :

What i Dividend!

What i dividend policy!

"heorie o# Dividend Policy

Relevant "heory

Walter$ %odel

&ordon$ %odel

Irrelevant "heory

%'%$ (pproach

"raditional (pproach
What i
Dividend!
)( dividend i a ditri*ution to
hareholder out o# pro+t or reerve
availa*le #or thi purpoe,-
' Intitute o# .hartered (ccountant o#
India
/or01"ype o#
Dividend

2n the *ai o# "ype o# Share

34uity Dividend

Pre#erence Dividend

2n the *ai o# %ode o# Pay0ent

.ah Dividend

Stock Dividend

Bond Dividend

Property Dividend

.o0poite Dividend

2n the *ai o# "i0e o#


Pay0ent

Interi0 Dividend

Re5ular Dividend

Special Dividend
.ont
d-
What i Dividend
Policy :

) Dividend policy deter0ine the


diviion o# earnin5 *etween pay0ent
to hareholder and retained earnin5,-
' Weton and Brin5ha0
Dividend Policie involve the deciion6
whether'

"o retain earnin5 #or capital invet0ent


and other purpoe7 or

"o ditri*ute earnin5 in the #or0 o#


dividend a0on5 hareholder7 or

"o retain o0e earnin5 and to ditri*ute


re0ainin5 earnin5 to hareholder-
.ont
d-
/actor (8ectin5 Dividend
Policy

Le5al Retriction

%a5nitude and trend o# earnin5

Deire and type o# Shareholder

Nature o# Indutry

(5e o# the co0pany

/uture /inancial Re4uire0ent

"a9ation Policy

Sta5e o# Buine cycle

Re5ularity

Re4uire0ent o# Intitutional Invetor


.ont
d-
Di0enion o#
Dividend Policy

Pay'out Ratio

/und re4uire0ent

Li4uidity

(cce to e9ternal ource o# +nancin5

Shareholder pre#erence

Di8erence in the cot o# 39ternal 34uity


and Retained 3arnin5

.ontrol

"a9e

Sta*ility

Sta*le dividend payout Ratio

Sta*le Dividend or Steadily chan5in5


Dividend
.ont
d-
"ype o# Dividend
Policy

Re5ular Dividend Policy

Sta*le Dividend Policy

.ontant dividend per hare

.ontant pay out ratio

Sta*le rupee dividend : e9tra


dividend

Irre5ular Dividend Policy


DIVID3ND
";32RI3S
Relevance
"heorie

Pro#- <a0e 3 Walter ar5ued that in the


lon5'run the hare price re=ect only the
preent value o# e9pected dividend-
Retention in=uence tock price only
throu5h their e8ect on #uture dividend-
Walter ha #or0ulated thi and ued the
dividend to opti0ize the wealth o# the
e4uity hareholder-
Walter$
%odel

(u0ption o# Walter$
%odel:

Internal /inancin5

contant Return in .ot o#


.apital

>??@ payout or Retention

.ontant 3PS and DPS

In+nite ti0e
/or0ula o# Walter$ %odel
Where6
P A .urrent %arket Price o# e4uity hare
3 A 3arnin5 per hare
D A Dividend per hare
B3'DC A Retained earnin5 per hare
r A Rate o# Return on +r0$ invet0ent or Internal
Rate o# Return
k A .ot o# 34uity .apital
P
D : r B3'DC
k
k
A

&rowth /ir0 Br D k):


r A E?@ k A >F@ 3 A R- G
I# D A R- G
P A G:B?C ?-E? 1? ->F A R- EH-HI
?->F
I# D A R- E
P A E:BEC ?-E? 1 ?->F A R- J>->>
?->F
Illutratio
n :

Nor0al /ir0 Br A k):


r A >F@ k A >F@ 3 A R- G
I# D A R- G
P A G:B?C ?->F 1 ?->F A R- EH-HI
?->F
I# D A R- E
P A E:BEC ?->F 1 ?->F A R- EH-HI
?->F
Illutratio
n :

Declinin5 /ir0 Br K k):


r A >?@ k A >F@ 3 A R- G
I# D A R- G
P A G:B?C ?->? 1 ?->F A R- EH-HI
?->F
I# D A R- E
P A E:BEC ?->? 1 ?->F A R- EE-EE
?->F
Illutratio
n :
38ect o# Dividend Policy on Value o#
Share
.ae I# Dividend Payout
ratio Increae
I# Dividend Payout
Ration decreae
>- In cae o# &rowin5
+r0 i-e- where r D k
%arket Value o# Share
decreae
%arket Value o# a
hare increae
E- In cae o#
Declinin5 +r0 i-e-
where r K k
%arket Value o# Share
increae
%arket Value o# hare
decreae
J- In cae o# nor0al
+r0 i-e- where r A k
No chan5e in value o#
Share
No chan5e in value o#
Share
.ritici0 o# Walter$
%odel

No 39ternal /inancin5

/ir0$ internal rate o# return doe not


alway re0ain contant- In #act6 r
decreae a 0ore and 0ore
invet0ent in 0ade-

/ir0$ cot o# capital doe not alway


re0ain contant- In #act6 k chan5e
directly with the +r0$ rik-
&ordon$
%odel
4
(ccordin5 to Pro#- &ordon6 Dividend Policy
al0ot alway a8ect the value o# the
+r0- ;e Showed how dividend policy can
*e ued to 0a9i0ize the wealth o# the
hareholder-
4
"he 0ain propoition o# the 0odel i that
the value o# a hare re=ect the value o#
the #uture dividend accruin5 to that
hare- ;ence6 the dividend pay0ent and
it 5rowth are relevant in valuation o#
hare-
4
"he 0odel hold that the hare$ 0arket
price i e4ual to the u0 o# hare$
dicounted #uture dividend pay0ent-

(u0ption:

(ll e4uity +r0

No e9ternal /inancin5

.ontant Return

.ontant .ot o# .apital

Perpetual 3arnin5

No ta9e

.ontant Retention

.ot o# .apital i 5reater then 5rowth rate


BkD*rA5C
/or0ula o# &ordon$
%odel

Where6
P A Price
3 A 3arnin5 per Share
* A Retention Ratio
k A .ot o# .apital
*r A 5 A &rowth Rate
P
A
3 B> L
*C
M ' *r

&rowth /ir0 Br D k):


r A E?@ k A >F@ 3 A R- G
I# * A ?-EF
P? A B?-IFC G A R- J?
?->F' B?-EFCB?-E?C
I# * A ?-F?
P? A B?-F?C G A R- G?
?->F' B?-FCB?-E?C
Illutratio
n :

Nor0al /ir0 Br A k):


r A >F@ k A >F@ 3 A R- G
I# * A ?-EF
P? A B?-IFC G A R- EH-HI
?->F' B?-EFCB?->FC
I# * A ?-F?
P? A B?-F?C G A R- EH-HI
?->F' B?-FCB?->FC
Illutratio
n :

Declinin5 /ir0 Br K k):


r A >?@ k A >F@ 3 A R- G
I# * A ?-EF
P? A B?-IFC G A R- EG
?->F' B?-EFCB?->?C
I# * A ?-F?
P? A B?-F?C G A R- E?
?->F' B?-FCB?->?C
Illutratio
n :
.ritici0 o# &ordon$
0odel

( the au0ption o# Walter$


%odel and &ordon$ %odel are
a0e o the &ordon$ 0odel
u8er #ro0 the a0e li0itation
a the Walter$ %odel-

Irrelevance
"heorie
Modigliani & Millers
Irrelevance Model
Depend on
Depend on
%odi5liani and %iller$
(pproach

(u0ption

.apital %arket are Per#ect and people


are Rational

No ta9e

/loatin5 .ot are nil

Invet0ent opportunitie and #uture


pro+t o# +r0 are known with certainty
B"hi au0ption wa dropped laterC

Invet0ent and Dividend Deciion are


independent
%'%$
(r5u0ent

I# a co0pany retain earnin5 intead o#


5ivin5 it out a dividend6 the
hareholder enjoy capital appreciation
e4ual to the a0ount o# earnin5
retained-

I# it ditri*ute earnin5 *y the way o#


dividend intead o# retainin5 it6
hareholder enjoy dividend e4ual in
value to the a0ount *y which hi capital
would have appreciated had the
co0pany choen to retain it earnin5-

;ence6
the diviion o# earnin5 *etween dividend
and retained earnin5 i IRR3L3V(N" #ro0 the
point o# view o# hareholder-
/or0ula o# %'%$
(pproach
P
o
A
>
B D>:P> C
B> : pC
Where6
Po A %arket price per hare at ti0e
?6
D> A Dividend per hare at ti0e >6
P> A %arket price o# hare at ti0e >

"he e9preion o# the outtandin5


e4uity hare o# the +r0 at ti0e ? i
o*tained a:
nPo
A
> NnD>:Bn : mCP>'
mP>O
B> : pC
nPo
A
> BnD>:nP>C
B> : pC
nPo
A
> PnD>: Bn : mCP>L NI L BQ L
nD>COR
B> : pC
mP> A I L BQ L
nD>C
Where6
Q A "otal net pro+t o# the
+r0 #or year >
nPo
A
> nD>: Bn : mCP>L I :Q L
nD>
B> : pC
nPo
A
> Bn : mCP>L I :Q
B> : pC
.ritici0 o# %'%
%odel

No per#ect .apital %arket

39itence o# "ranaction .ot

39itence o# /loatation .ot

Lack o# Relevant In#or0ation

Di8erential rate o# "a9e

No +9ed invet0ent Policy

Invetor$ deire to o*tain current


inco0e
"raditional
(pproach

"hi theory re5ard dividend deciion


0erely a a part o# +nancin5 deciion
*ecaue

"he earnin5 availa*le 0ay *e retained in


the *uine #or re'invet0ent

2r i# the #und are not re4uired in the


*uine they 0ay *e ditri*uted a
dividend-

"hu the deciion to pay the dividend or


retain the earnin5 0ay *e taken a a
reidual deciion

"hi theory au0e that the invetor


do not di8erentiate *etween dividend
and retention *y the +r0

"hu6 a +r0 hould retain the earnin5


i# it ha pro+ta*le invet0ent
opportunitie otherwie it hould pay
than a dividend-
Synopi

Dividend i the part o# pro+t paid to


Shareholder-

/ir0 decide6 dependin5 on the pro+t6 the


percenta5e o# payin5 dividend-

Walter and &ordon ay that a Dividend


Deciion a8ect the valuation o# the +r0-

While the "raditional (pproach and %%$


(pproach ay that Value o# the /ir0 i
irrelevant to Dividend we pay-
Bi*lio5rap
hy

&oo5le

/inancial 0ana5e0ent *y praanna


chandra-