resenLaLlon on dlvldend pollcy

of Ashok Leyland
resenLed 1o
ur Slmml Agrawal
(laculLy of llnance)
resenLed 8?
8upesh Slngh(010129)
SaLvlnder Slngh(010133)
vlshal raLap(010167)
vlshanL vohra(010168)
vlvek Mlshra(010169)
AbouL Ashok Leyland
1he Croup was esLabllshed ln 1914 ln Mumbal
LnLered Mlddle LasL ln 1919 Lo grow Lradlng
lnlLlaLlves
resence ln more Lhan 23 counLrles and
operaLes across Lhe globe
LnLered lndla for slgnlflcanL buslness acLlvlLles
ln 1987
Lmploys over 33000 personnel worldwlde
ond
Second LargesL ommerclal vehlcle manufacLurer ln
lndla wlLh Lurnover uSu 2 8n
CperaLlng ln 1ruck 8us segmenLs 731
Lmploylng over 12000 people
represenLlng lnLernaLlonal quallLy sLandards
speclflc Lo AuLo lndusLry
LxporLs Lo over 30 counLrles ln Asla Lhe Mlddle
LasL Afrlca
LlsLed on Mumbal and naLlonal SLock Lxchange and
on London SLock Lxchange
unbroken proflL and dlvldend Lrack record
Sa|es Sa|es
Larnlng before uepreclaLlon lnLeresL and 1axes
1he Cross proflL of a company before any
deducLlon
AfLer deducLlng lnLeresL osL uepreclaLlon and
1axes we are lefL wlLh A1( roflL AfLer 1ax)
NET PROFIT
A Iinancial gain which is achieved by the Iirm
over a period aIter incurring all the cost and
losses.
DIVIDEND
Dividends reIers to that part oI net proIits oI a
company which is distributed among shareholders
as a return on their investment. Dividend is paid
on preIerence as well as equity share oI the
company.
WHAT IS DIVIDEND POLICY
The dividend policy means the broad approach
according to which every year it is determined
how much oI the net proIits are to be
distributed as dividend and how much are to be
retained in the business Ior the company's
growth.
The objective oI dividend policy should be to
maximize shareholders return so that the value
oI his investment is maximized.
Dividend decisions
Long Lerm flnanclng approach of dlvldend
declslon
wealLh maxlmlzaLlon approach of dlvldend
declslons
Types of dividend policy
SLable dlvldend pollcy
Low regular dlvldends plus exLra dlvldends
pollcy
ulvldends flucLuaLlng wlLh earnlngs pollcy
ollcy of no dlvldend aL presenL
Earnings or Profits can be put to
two uses
1.Retained earnings i.e., reinvested in the
business
2.Dividend i.e., paid to the shareholders
Many corporations retain a portion oI their
earnings and pay the remainder as a dividend
Types of Dividend
Cash dividend
Stock dividend or Bonus shares
Scrip dividend
Bond dividend
Property dividend
Composite dividend
8CnuS SPA8L
A bonus share is a Iree share oI stock given to
current/existing shareholders in a company, based upon
the number oI shares that the shareholder already owns
at the time oI announcement oI the bonus. While the
issue oI bonus shares increases the total number oI
shares issued and owned, it does not increase the value
oI the company.
arn|ng per share and D|v|dend per share
ear 9S D9S
Mar 2006 268 120
Mar 2007 333 130
Mar 2008 333 130
Mar 2009 343 100
Mar 2010 318 130
Comparison Between
D|v|dend 9ayout kat|o
ear kat|o
Mar 2006 447
Mar 2007 430
Mar 2008 424
Mar 2009 184
Mar 2010 471
D|v|dend 9ayout rat|o
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10
d|v|dend payout rat|o
dividend payout ratio
MODELS
WALTERS MODEL
GORDONS MODEL
THE MILLER-MODIGLIANI HYPOTHESIS
WALTERS MODEL
ProIessor James E. Walter argues that the choice oI
dividend policies almost always aIIect the value oI
the Iirm.
This model shows the importance oI the relationship
between the Iirms rate oI return, r, and its cost oI
capital, k, in determining the dividend policy that
will maximise the wealth oI the shareholders.
ASSUMPTIONS
Internal Iinancing
Constant return and cost oI capital
100 per cent payout or retention
Constant EPS and DIV
InIinite time
Walters Iormula to determine the market price per share is as
Iollows:
P DIV + r (EPS-DIV) / k
k k
P market price per share.
DIV dividend per share.
EPS earning per share.
r Iirms rate oI return.
k Iirms cost oI capital or capitalization rate
ORDONS MODEL
Myron Gordon developed one very popular model explicitly
relating the market value oI the Iirm to dividend policy.
Gordons model based on the Iollowing assumptions
All equity Iirm
No external Iinancing
Constant return
Constant cost oI capital
Perpetual earnings
No taxes
Constant retention
Cost oI capital is greater than the growth rate.
Gordons Iormula to determine the present value oI the share is as
Iollows:
P
0
EPS(1 - b)/ k - br or DIV/ k - g
P
0
price oI equity share.
EPS earning per share.
b retention ratio.
1 b D/P ratio.
DIV dividend per share.
k capitalization rate oI Iirm or cost oI capital.
r internal rate oI return
g growth rate
CRITICISM
No external Iinancing.
Constant rate oI return
Constant cost oI capital.
MILLER AND MODILIANI
HYPOTHESIS
&nder a perIect market situation, the dividend policy oI a
Iirm is irrelevant, as it does not aIIect the value oI the Iirm.
A flrm operaLlng ln perfecL caplLal markeL condlLlons may
face one of Lhe followlng Lhree slLuaLlons regardlng Lhe
paymenL of dlvldends
1he flrm has sufflclenL cash Lo pay dlvldends
1he flrm does does noL have sufflclenL cash Lo pay
dlvldends and Lherefore lL lssues new share Lo flnance Lhe
paymenL of dlvldends
1he flrm does noL pay dlvldends buL shareholders need
cash
ASSUMPTIONS
erfecL caplLal markeLs
no Laxes
lnvesLmenL pollcy
no rlsk