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The Impacts of Dividend Policy on the Market Price of the Share

Prepared By Group No: 12

Definition of Dividend

A dividend is a payment made by a company to its shareholders.

When a company earns a profit or surplus, it can re-invest it in the business (called retained earnings), and pay a fraction of the profit as a dividend to shareholders.

Types of Payment of DividendCash dividendStock dividendProperty dividendScrip dividendLiquidating dividendSplit Stock:Stock Split

Types of Dividend Policy

1.Regular dividend policyDividend payable at the usual rate is

called as regular dividend policy. This type of policy is suitable to the small investors, retired persons and others.

2.Stable dividend policyIt means payment of certain minimum

amount of dividend regularly paid to the shareholders. It is of three types:

i. Constant dividend per share;ii. Constant payout ratio;iii. Stable rupee dividend plus extra dividend

Cont’d3. Irregular dividend: When the companies are facing constraints of earnings and

unsuccessful business operation, they may follow this policy.It is one of the temporary arrangements to meet the financial problems.

The company uses this practice due to following reasons: Due to uncertain earning of the company. Due to lack of liquid resources. The company sometime afraid of giving regular dividend. Due to not so much successful business.4) No dividend: The company may use this type of

dividend policy due to requirement of funds for the growth of the company.

Theories of Dividend Policy

Dividend Policy Affects the Value of the Firm

Let’s prove the above mentioned statement mathematically following the Walter’s Model.

To do so, we have taken into consideration three pharmaceuticals company.

As we have followed Walter’s relevant theory so we have also followed his assumptions in finding the value of the firm. For example, we have considered return on shareholder’s fund (ke) and return on investment as constant.

Determination of Market Price of ACI Pharmaceuticals Ltd.

Return on shareholder’s equity ( ke) =13.28%Return on investment (r) =18.12%

Year EPS(Tk.) D/P Ratio (%) DPS Prevailing Market Price of Share(Tk.)

2010 30.49 39.36 12 280

2011 28.83 34.69* 10 269*

2012 19.11 52.33* 10 169*

2013 22.27 47.15 10.5 200

2014 27.65 41.59 11.50 253

Determination of Market Price of Orion Pharmaceuticals LtdReturn on shareholder’s equity (ke) =6.59%Return on investment (r) =5.21%

Year EPS(Tk.) D/P Ratio (%) DPS Prevailing Market Price of Share(Tk.)

2010 5.89 100* 5.89 101*

2011 3.93 66.95 2.63 55.5

2012 1.92 32.70 .628 25

2013 1.67 28.44* .475 21.5*

2014 1.77 38.90 .69 23.5

Findings and Analysis

In table 1 of ACI Pharmaceuticals Ltd., r was 18.12 and k was 13.28 that means r>k. According to Walter Model, if D/P Ratio increases, Value of the firm decreases and vice versa. Now we prove this statement with table number 1. When D/P Ratio was 34.69%, the market price of share was Tk.269. But when D/P Ratio increased at 52.33%, Market Price of share stood Tk. 169.

On the contrary, in table 2 of Orion Pharmaceuticals Ltd., r was 5.21% and k was 6.59% that means r<k. In this case If D/P is increased, Value of the firm is also increased and vice versa. Ok, let’s show this relationship between r and k through table number 2. When Dividend Payout of Orion Pharmaceuticals Ltd was 28.44%, the market price of share was then only Tk.21.5.But whenever the D/P Ration increased up to 100%, then the value of the firm has been also increased up to Tk. 101

So it is quite clear that the choice of dividend policies almost always affects the value of the firms.

CONCLUSION In conclusion we can say that Dividend policy

almost always has impact on the price of the share.

In our report we followed the Walter’s Model and have found that when return on investment is more than return on shareholder’s fund in that case if dividend payout increases, then value of the firm decreases and vice versa.

On the other hand when return on investment is smaller than return on shareholder’s equity in that case if Dividend Payout Ratio increases, Value of the firm also increases.

So it is quite clear that dividend policy really affects the market value of share namely the value of the company.