designing dividend policy(1)

8/15/2019 Designing Dividend Policy(1)

1/24


2/24

Firm’s Need for Funds

Shareholders’ Need for Income

2

OBJECTIVES OF DIVIDEND POLICY


3/24

Firm’s Investment Opportunities and Financial Needs

Shareholders’ Expectations

Constraints on Paying ividends

◦ !egal restrictions◦ !i"uidity

◦ Financial condition and #orro$ing capacity

◦ %ccess to the capital mar&et

◦ 'estrictions in loan agreements◦ Inflation

◦ Control

(

PRACTICAL CONSIDERATIONS IN DIVIDEND

POLICY


4/24

Constant ividend per Share or ividend 'ate)

Constant Payout)

Constant ividend per Share Plus Extra ividend)

*

STABILITY OF DIVIDENDS


5/24

+

Constant dividend e! s"a!e olicy


6/24

,

Dividend olicy o# constant ayo$t !atio


7/24

Constant ividend Per Share Plus Extra ividend

Interim ividend


8/24

'esolutions of investors uncertainty)

Investors’ desire for current income)

Institutional Investors’ 'e"uirement)

'aising %dditional Finances)

-

Signi#icance o# Sta%ility o# Dividends


9/24

Cash ividends

.onus Shares /Stoc& ividend0

1

FOR&S OF DIVIDENDS

•

he cash account and the reserve account of a company $ill #e reduced$hen the cash dividend is paid

• .oth the otal %ssets and Net 3orth of company $ill #e reduced

• 4ar&et Price of the share should drop #y the amount of cash dividend paid


10/24

3alchund !td) pays #onus shares in ratio 5657) %t the time of issue #onusshares8 the 4PS is 's (7) he #onus shares are issued at the mar&et price9

a premium of 's 27 over the face value of 's 57 each share

Bon$s S"a!es

's

CrorePaid up Share Capital/5 crShare8 's57:share0 57

Share Premium 5+

'eserve ; Surplus -

's

Crore

Paid up Share Capital/5cr Share8 's57:share0 55

Share Premium 5<

'eserve ; Surplus +

Does the issue of bonus shares increase the wealth of

shareholders?


11/24

To shareholders:

◦ Indication of higher future profits

◦ Future dividends may increase

◦ Psychological value

To company:

◦ Conservation of cash

◦ 4ore attractive share price

55

Advantages o# Bon$s S"a!es


12/24

Shareholders’ $ealth remains unaffected

axation Impact SC= axa#le >5+? COI is @ero

Costly to administer

Pro#lem of adAusting EPS and P:E ratio

52

Li'itations o# Bon$s S"a!es


13/24

% company is not allo$ed to declare #onus shares

unless partly paid up shares have #een converted into

fully paid up shares

.onus shares are made out of share premium and freereserves

4inimum 'eserves need to #e maintain6 It re"uires

that the reserve remaining after the amount capitali@ed

for #onus shares should #e at least *7? of theincreased capital

5(

Conditions #o! t"e Iss$e o# Bon$s S"a!es


14/24

% share split is a method to increase the num#er of

outstanding shares through a proportional reduction in

the par value of the share) % share split affects only the

par value and the num#er of outstanding sharesB theshareholders’ total funds remain unaltered)

5*

S"a!e slit


15/24

he follo$ing is the capital structure of 3alchand Sons

; Company6

3alchand Company split their shares t$o9for9one) he

capitali@ation of the company after the split is as follo$s6

5+

E(a'le


16/24

he #onus issue and the share split are similar except

for the difference in their accounting treatment)

In the case of #onus shares8 the #alance of the

reserves and surpluses account decreases due to atransfer to the paid9up capital and the share premium

accounts) he par value per share remains

unaffected)

3ith a share split8 the #alance of the e"uity accounts

does not change8 #ut the par value per share changes)

5,

Bon$s S"a!e vs. S"a!e Slit


17/24


18/24

nder the situation of falling price of a company’s share8 the

company may $ant to reduce the num#er of outstanding

shares to prop up the mar&et price per share)

he reduction of the num#er of outstanding shares #y

increasing per share par value is &no$n as a reverse split)

he reverse split is generally an indication of financial

difficulty8 and is8 therefore8 intended to increase the mar&et

price per share)

5-

Reve!se Slit


19/24

he #uy#ac& of shares is the repurchase of its o$n

shares #y a company)

%s a result of the Companies %ct /%mendment0 51118a company in India can no$ #uy#ac& its o$n shares)

51

B)YBAC* OF S+ARES


20/24

% company #uying #ac& its shares $ill not issue fresh capital8

except #onus issue8 for the next 52 months)

he company $ill state the amount to #e used for the #uy#ac&

of shares and see& prior approval of shareholders)

he #uy#ac& of shares can #e affected only #y utili@ing the

free reserves8 vi@)8 reserves not specifically earmar&ed for

some purpose)

he company $ill not #orro$ funds to #uy #ac& shares)

he shares #ought under the #uy#ac& schemes $ill #e

extinguished and they cannot #e reissued)

27

In India t"e #ollo,ing conditions aly in

case o# t"e %$y%ac- s"a!es.


21/24

First8 a company can #uy its shares through

authori@ed #ro&ers on the open mar&et)

Second8 the company can ma&e a tender offer8 $hich$ill specify the purchase price8 the total amount and

the period $ithin $hich shares $ill #e #ought #ac&)

25

&et"ods o# S"a!es B$y%ac-


22/24

It is #elieved that the #uy#ac& $ill #e financially

#eneficial for the company8 the #uying shareholders

and the remaining shareholders)

Increase in the company’s de#t9e"uity ratio due to

reduced e"uity capital)

22

E##ects o# t"e S"a!es B$y%ac-


23/24

'eturn of surplus cash to shareholders

Increase in the share value

Increase in the temporarily undervalued share price

%chieving the target capital structureConsolidating control

Protection against hostile ta&eovers

2(

Advantages o# t"e B$y%ac-


24/24

Not an effective defence against ta&eover

Shareholders do not li&e the #uy#ac&

!oss to the remaining shareholders

Signal of lo$ gro$th opportunities

2*

D!a,%ac-s o# t"e B$y%ac-

designing dividend policy(1)

Documents