DIVIDEND POLICY II

OBJECTIVES

Objectives of dividend policy Factors influencing a firms dividend policy Stability of dividend Form of dividend

Objective of dividend policy

Firms

need for funding new projects Fulfill the shareholders expectation Divide the net earnings into dividends and retained earnings in an optimum way to achieve the objective of maximizing the wealth of shareholders

Factors influencing the dividend policy

Firms

investment opportunities and financial needs Shareholders expectations - closely held companies - widely held companies Constraints on paying dividends - legal constraints - financial constraints

Financial condition and borrowing capacity Access to the capital market Restrictions in loan agreements Inflation Control

STABILITY OF DIVIDENDS
Regularity in paying some dividend annually Constant dividend per share or dividend rate Constant payout Constant dividend per share plus extra dividend

MERITS

Resolves uncertainty in the minds of investors Fulfills the desire for current income by investors Caters to the requirements of institutional investors Facilitates easy accessibility to capital market DEMERITS Adversely affect the investors when the firm misses the definite pattern

Forms of Dividends Cash dividend Stock dividend /Bonus issue - Meaning - Merits A) To the shareholders- tax benefit, indication of higher future value, increase in future dividend, psychological value. B) To the company conservation of cash, only means to pay dividend under financial difficulties and contractual restrictions and more attractive share price by bringing down the market price.

Limitations of Bonus Issue Shareholders wealth remains unaffected Costly to administer Problem of adjusting EPS and P/E ratio. Condition for the Bonus Issue partly paid up shares should by converted into fully paid-up shares. Issue should be made out of share premium and free reserves and not out of capital reserve on account of asset revaluation.

Firm willing to issue bonus shares should not be in default of payment of statutory dues to employees and term loan to financial institutions The maximum bonus issue can be 1:1. Residual reserve criterion company should have a minimum reserve of 40% of increased paid-up capital after bonus issue. Profitability criterion 30% of the previous three years average PBT should be at least equal to 10% of the increased paid-up capital