What effect does dividend decision have on the Firm's Value an

assessment on Interglobe Aviation.

Submitted To: Submitted By:

Dr. Tarun Soni Prabh Mehar Singh

119/2019

Section B

About the Company

IndiGo is an Indian low-cost airline headquartered in Gurugram, Haryana, India. It is the
largest airline in India by passengers carried and fleet size, with a 47.5% domestic market share
as of November 2019. It is also the largest individual Asian low-cost carrier in terms of jet fleet
size and passengers carried, and the sixth largest carrier in Asia with over 64 million passengers
carried in financial year 2018–19. The airline operates 1500 flights every day to 87 destinations –
63 domestic and 24 internationals. It has its primary hub at Indira Gandhi International Airport,
Delhi.

The airline was founded as a private company by Rahul Bhatia of InterGlobe Enterprises
and Rakesh Gangwal, a United States-based expatriate Indian in 2006. It took delivery of its first
aircraft in July 2006 and commenced operations a month later. The airline became the largest
Indian carrier by passenger market share in 2012. The company went public in November 2015.

It commenced operations on 4 August 2006 with a service from New

Delhi to Imphal via Guwahati. By the end of 2006, the airline had six aircraft and nine more
aircraft were acquired in 2007. In December 2010, IndiGo replaced state-run carrier Air India as
the third largest airline in India, behind Kingfisher Airlines and Jet Airways with a passenger
market share of 17.3%.

In 2011, IndiGo placed an order for 180 Airbus A320 aircraft in a deal worth US$15 billion. In
January 2011, after completing five years of operations, the airline got permission to launch
international flights. In December 2011, the DGCA expressed reservations that the rapid
expansion could impact passenger safety.

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 INTRODUCTION TO TOPIC
Dividend policy is defined as a deliberate action of managers to distribute portion of earnings to
shareholders in proportion of their holdings in the firm called dividend; the distribution of earnings
to shareholders can be in form of cash dividend, bonus or script dividend, repurchased stock etc.
the expected relationship between dividend paid out ratio and retention ratio is inversely related
such that increase in retention ratio will bring about reduction in payout ratio of the firm, yet the
duo work together for shareholder’s wealth maximization, it is practically impossible to formulate
one without affecting the other.

Dividend policy is the policy a company uses to structure its dividend payout to shareholders.
Some researchers suggest that dividend policy may be irrelevant, in theory, because
investors can sell a portion of their shares or portfolio if they need funds. Dividend decision is
extremely important to company’s valuation which practically translate to capital gain in share
prices; shareholder’s wealth maximization is a paramount objective of a finance manager; which
serve as return on investment outlay as reflected in the value of the firm. Return consist of two
components: dividends and bullish stock (capital gain), despite the inverse relationship between
dividend and earnings ratio, dividend and retained earnings have similar purpose towards
maximizing shareholders interest (wealth); the unshared profit (retained earnings) are used to
finance viable projects for expansion while dividend increases the bargaining power of
stakeholders. However, finance managers often strive to increase the basic fundamentals of their
company; the fundamentals of companies as opined by the fundamentalist are earnings,
earnings per share, dividend yield, dividend payout ratio, and dividend cover among others.
Good fundamentals of firms are reflected in share price movement in the stock market which
ultimately translates to shareholders wealth maximization

Data Methodology

Data Sources:
https://www.investopedia.com/terms/d/dividendpolicy.asp
https://www.bseindia.com/indices/IndexArchiveData.html
https://www.interglobe.com/
https://en.wikipedia.org/wiki/IndiGo
https://www.moneycontrol.com/india/stockpricequote/transportlogistics/interglobeaviation/IA04

NUMBER OF YEARS TAKEN FOR STUDY:

2
4 Years: 1st April 2016 to 20th Feb 2020

INDICATORS OF FIRM VALUE:

1.P/E Ratio-The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that
measures its current share price relative to its per-share earnings (EPS). The price-to-earnings
ratio is also sometimes known as the price multiple or the earnings multiple.

P/E ratios are used by investors and analysts to determine the relative value of a company's
shares in an apples-to-apples comparison. It can also be used to compare a company against its
own historical record or to compare aggregate markets against one another or over time.

 The price-earnings ratio (P/E ratio) relates a company's share price to its earnings per
share.
 A high P/E ratio could mean that a company's stock is over-valued, or else that investors
are expecting high growth rates in the future.
 Companies that have no earnings or that are losing money do not have a P/E ratio since
there is nothing to put in the denominator.

2.Market price a share-The market price per share of stock—usually termed simply "share
price"— is the dollar amount that investors are willing to pay for one share of a company's stock.
It has no specific relation to the value of the company's assets, such as book value per
share does, which is based on the information from a company's balance sheet. The market
value per share or fair market value of a stock is the price that a stock can be readily bought or
sold in the current marketplace. In other words, the market value per share is the “going price” of
a share of stock.

Dividend Summary
For the year ending March 2019 Interglobe Aviation has declared an equity dividend of 50.00%
amounting to Rs 5 per share. At the current share price of Rs 1416.30 this results in a dividend
yield of 0.35%.

The company has a good dividend track report and has consistently declared dividends for the
last 5 years.

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 Announcement Effective Dividend Dividend
Remarks
Date Date Type (%)

27-05-2019 19-08-2019 Final 50.00 Rs.5.0000 per share(50%)Final

Dividend

02-05-2018 02-08-2018 Final 60.00 Rs.6.0000 per share(60%)Final

Dividend

10-05-2017 18-08-2017 Final 340.00 Rs.34.0000 per

share(340%)Dividend

29-04-2016 12-09-2016 Final 150.00 Rs.15.0000 per

share(150%)Final Dividend

Methodology: Share prices were studied for a time span of 4 years. Dates were chosen
keeping in mind the Announcement Date of dividends and a time interval of 20 days before
and after the Dividend Announcement Date.
The data below shows the opening and closing share prices of Interglobe Aviation Ltd, it’s
traded value and S&P BSE index price over a period of 4 years keeping in mind the
Dividend Announcement Date and its impact on Firm Value.
Highlighted in Green represents the date of declaration of Dividend.

Date Close Close Date Close Close

Interglobe Aviation S&P BSE Interglobe S&P BSE
Share Price Index Aviation Share Index
Price
28-04-2016 1,005.73 25,441.47 30-04-2018 1,456.90 34,237.16
29-04-2016 1,072.15 25,606.6 02-05-2018 35,176.42
2 1,348.25
31-05-2016 28-05-2018
1,035.67 25,693.69 1,177.42 35,077.56

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 Date Close Close Date Close Close
Interglobe Aviation S&P BSE Interglobe S&P BSE
Share Price Index Aviation Share Index
Price
09-05-2017 1,110.79 29,766.97 24-05-2019 1,546.37 38,324.63
10-05-2017 1,124.20 30,248.1 27-05-2019 1,663.00
7 39,683.29
07-06-2017 1,092.95 30,775.76 28-06-2019 1,632.77 39,566.39

Analysis and Data Interpretation

Date Stock Return Index Return Abnormal Gain
29-04-2016 2.977% 0.991% 1.986%
10-05-2017 -1.606% 3.389% -4.995%
02-05-2018 -19.183% 2.455% -21.638%
02-05-2018 5.587% 3.240% 2.347%

Abnormal Gain
5.000%

0.000%
4/29/2016 5/10/2017 5/2/2018 5/2/2018
-5.000%

-10.000%

-15.000%

-20.000%

-25.000%

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 Findings and Conclusions

 We had calculated the average price for Interglobe Aviation for 15 days before and after the
dividend was declared, the same procedure was followed for calculation of the index of S&P
BSE Index.
 Then Abnormal Gain was calculated but subtracting the share price of Interglobe Aviation
from the Index return.
 As shown in the above calculations, the dividend has had a positive as well as a negative
impact on the share prices.
 As per various theories given The Modigliani and Miller school of thought believes that
investors do not state any preference between current dividends and capital gains.
 They say that dividend policy is irrelevant and is not deterministic of the market value.
Therefore, the shareholders are indifferent between the two types of dividends.
 All they want are high returns either in the form of dividends or in the form of re-investment
of retained earnings by the firm.

Dividend is that portion of the after

tax profit that is distributed to
shareholders on a pro-rata basis
(Agarwal, 1991);
there are various factors that affect
the payment of dividend such as:
liquidity, government policy,
investment
decisions, taxation among others.
Difference schools of thought have
contributed to identify the
relevance of
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dividend policy in determining the
value of a firm.
The empirical result in our analysis
revealed that dividend per share
have an inverse relationship with
the share price in the stock market;
this result is in agreement with the
empirical analysis done by so many
scholars
in the field of finance; though,
earnings per share have shown a
predominant features in enhancing
the value of a
firm. The ordinary least square result
shows both positive and significant
relationship between earnings per
share
and stock market prices while
internal rate of return is both inverse

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and insignificant to the stock price
movement
in the stock market.
It is therefore recommended that
financial managers should always
implement decisions that will adjust
the equity- debt structure in the
balance sheet in order to enhance the
earnings per share, as every rational
investor
tend to used the earnings per share as
rationale in valuing the company
which will be reflected in the share
price
of the firm. Consistency in
dividend payment cannot be over-
emphasis as a key factor used by
investors and
shareholders to determine the value
of the company.
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Dividend is that portion of the after
tax profit that is distributed to
shareholders on a pro-rata basis
(Agarwal, 1991);
there are various factors that affect
the payment of dividend such as:
liquidity, government policy,
investment
decisions, taxation among others.
Difference schools of thought have
contributed to identify the
relevance of
dividend policy in determining the
value of a firm.
 Dividend is that portion of the after tax profit that is distributed to shareholders on a pro-
rata basis there are various factors that affect the payment of dividend such as: liquidity,
government policy, investment decisions, taxation among others.
 Difference schools of thought have contributed to identify the relevance of dividend policy in
determining the value of a firm.
 Thus, the dividend must be declared by looking at the conditions of the market because the
market conditions play a very important role in deciding whether the dividend decision will
have positive impact on the share price.