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    Dividend: Dividend Payout Ratio Refers To The Percent of Net Profit To Be Distributed

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    sonal jain
    Dividends refer to corporate profits distributed to shareholders. There are two types of dividends: preference dividends which are fixed amounts paid annually, and equity dividends which are paid from remaining profits. A company's dividend policy considers factors like its dividend payout ratio, stability of dividends over time, legal constraints, the company's age and access to capital markets, and inflation. Approaches to determining dividend policy include Gordon's model which links dividend payout to share price and Modigliani and Miller's approach which found capital structure does not affect firm value. Ratio analysis evaluates financial metrics like profitability, liquidity, and asset efficiency over time and compared to standards.

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    Dividend: Dividend Payout Ratio Refers To The Percent of Net Profit To Be Distributed

    Uploaded by

    sonal jain
    32 views7 pages
    Dividends refer to corporate profits distributed to shareholders. There are two types of dividends: preference dividends which are fixed amounts paid annually, and equity dividends which are paid from remaining profits. A company's dividend policy considers factors like its dividend payout ratio, stability of dividends over time, legal constraints, the company's age and access to capital markets, and inflation. Approaches to determining dividend policy include Gordon's model which links dividend payout to share price and Modigliani and Miller's approach which found capital structure does not affect firm value. Ratio analysis evaluates financial metrics like profitability, liquidity, and asset efficiency over time and compared to standards.

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    financial management

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    FM report

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    Dividends refer to corporate profits distributed to shareholders. There are two types of dividends: preference dividends which are fixed amounts paid annually, and equity dividends which are paid from remaining profits. A company's dividend policy considers factors like its dividend payout ratio, stability of dividends over time, legal constraints, the company's age and access to capital markets, and inflation. Approaches to determining dividend policy include Gordon's model which links dividend payout to share price and Modigliani and Miller's approach which found capital structure does not affect firm value. Ratio analysis evaluates financial metrics like profitability, liquidity, and asset efficiency over time and compared to standards.

    Copyright:

    © All Rights Reserved
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    Download as docx, pdf, or txt
    32 views7 pages

    Dividend: Dividend Payout Ratio Refers To The Percent of Net Profit To Be Distributed

    Uploaded by

    sonal jain
    Dividends refer to corporate profits distributed to shareholders. There are two types of dividends: preference dividends which are fixed amounts paid annually, and equity dividends which are paid from remaining profits. A company's dividend policy considers factors like its dividend payout ratio, stability of dividends over time, legal constraints, the company's age and access to capital markets, and inflation. Approaches to determining dividend policy include Gordon's model which links dividend payout to share price and Modigliani and Miller's approach which found capital structure does not affect firm value. Ratio analysis evaluates financial metrics like profitability, liquidity, and asset efficiency over time and compared to standards.

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    of 7

    DIVIDEND

     Dividend refers to the corporate net profits distributed among


    shareholders.
     Dividends can be both preference dividends and equity dividends.
     Preference dividends are fixed dividends paid as a percentage every year
    to the preference shareholders if net earnings are positive.
     After the payment of preference dividends, the remaining net profits are
    paid or retained or both depending upon the decision taken by the
    management.

    DETERMINANTS OF DIVIDEND POLICY


     Dividend payout ratio
    Dividend payout ratio refers to the percent of net profit to be distributed
    as dividends by the firm to the shareholders. The remaining part of the
    earning is held by the firm for its further growth.

    DP Ratio = Dividend paid to shareholders / Net profit of the firm

    Dividend policy involves the decision to pay out earnings or to retain them
    for reinvestment in the firm.
    The retained earnings constitute a source of finance.

     Stability of dividends
     Dividend stability refers to the payment of a certain minimum
    amount of dividend regularly.
     Stability of dividend means how regular or stable is the dividend
    policy of a firm over a period of time.
     Shareholders prefer stable dividends along with some growth in
    those dividends.
     If a firm is able to pay dividends in such a way then the cost of shares
    will increase.
     Legal and contractual constraints
    Companies Act 2013, sections & instructions must be followed.
    Dividend can be paid either as:
    • Final Dividend that is paid after the annual general meeting of the firm
    after analyzing the earnings.
    • Interim Dividend that is paid in between the two Annual General Meetings
    of a firm, if firm seems to generate expected profits.
    Dividend is paid from the earnings of present year.
    Once the dividend amount is declared, that must be paid to the
    shareholders within 30 days.

     Age of the company


    The age of the company also influences the dividend decision of a
    company.
    A newly established concern has to limit payment of dividend and retain
    substantial part of earnings for financing its future growth and
    development, while older companies which have established sufficient
    reserves can afford to pay liberal dividends.

     Capital market considerations


    The extent to which the firm has access to the capital markets, also affects
    the dividend policy.
    In case the firm has easy access to the capital market, it can follow a liberal
    dividend policy.
    If the firm has only limited access to capital markets, it is likely to adopt a
    low dividend payout ratio.
    Such companies rely on retained earnings as a major source of financing
    for future growth.

     Inflation
    With rising prices due to inflation, the funds generated from depreciation
    may not be sufficient to replace obsolete equipment and machinery.
    So, they may have to rely upon retained earnings as a source of fund to
    replace those assets.
    Thus, inflation affects dividend payout ratio in the negative side.
    DIVIEND POLICY
     Dividend policy is set of guidelines a company uses to decide how much of
    its earning it will pay out to shareholders.
     Dividend policy implies companies through their board of directors evolve
    a defined pattern of dividend payments which has bearing on further
    actions.
     Dividend paid out of profit .these could either be profit of the current year
    or the accumulated profit of the past.

    APPROACHES TO DIVIDEND POLICY


    1. Gordon’s model
     Given by Myron Gordon S.
     Gordon’s theory on dividend policy states that company dividend payout
    policy and the relationship between its rate of return (r) and cost of capital
    (k) influence the market price per share of the company.
    Assumptions:
    • Rate of return r and cost of capital k is constant.
    • Life of firm is indefinite
    • Growth rate is constant
    • Cost of capital greater than br
    Formula for calculating market price per share:

    P = [E(1-B)]/Ke-br

    Where,
    P = Price of share
    e = Earnings per share
    B = retention ratio
    1-b = proportion of earning distributed as dividends
    Ke = capitalization rate
    Br = growth rate

    • ILLUSTRATIONS:
    2. Modigliani and Miller’s approach
    • This approach was devised by Modigliani and Miller during 1950s.
    • This suggests that the valuation of a firm is irrelevant to the capital
    structure of a company. Whether a firm is highly leveraged or has lower
    debt component in the financing mix, it has no bearing on the value of a
    firm.
    Assumptions:
     There are no taxes.
     Transaction cost for buying and selling securities as well as bankruptcy
    cost is nil.
     There is a symmetry of information. This means that an investor will have
    access to the same information that a corporation would and investors
    would behave rationally.
     The cost of borrowing is the same for investors as well as companies.
     There is no floatation cost like underwriting commission, payment to
    merchant bankers, advertisement expenses, etc.
     There is no corporate dividend tax.

    Formula for calculating market price per share:

    P1=Po*(1+ke)-D1

    Where,
    P1 = Market price of the share at the end of the period
    Po = market price of share at the beginning of a period
    Ke = cost of capital
    D1 = dividend received at the end of the period
    RATIO ANALYSIS
    Ratio analysis: An analytical technique that typically involves a comparison of
    the relationship between two financial items.
     Objectives of ratio analysis:
    • Standardize financial information for comparisons
    • Evaluate current operations
    • Compare performance with past performance
    • Compare performance against other firms or industry standards
    • Study the efficiency of operations

    Types of ratios:
    1. Liquidity ratios
     Current ratio = Current assets / Current liabilities
    Purpose: Measures a firm’s ability to pay its current liabilities from its current
    assets.
     Quick (Acid Test) Ratio = Current assets - Inventories / Current liabilities
    Purpose: Measures a firm’s ability to pay its current liabilities without relying on
    the sale of its inventory.
    2. Asset management ratio
     The Inventory Turnover Ratio= Sales/ Inventory.
    Purpose: Indicates the number of times that a firm sells its inventory each year.

     The Fixed Assets Turnover Ratio= Sales/ Net Fixed Assets


    Purpose: to measure how effectively the firm uses its plant and equipment to
    generate sales.

     Total Asset Turnover Ratio= Sales/ Total Assets


    Purpose: Measure efficiency of total assets for the company as a whole or for a
    division of the firm.
    3. Profitability ratio
     Profit Margin on Sales = Net Income/ Sales
    Purpose: Indicates the percentage of each sales dollar that contributes to net
    income.
     Return on Assets (ROA) = Net Income/ Total Assets
    Purpose: Measures the rate of return a firm realizes on its investment in assets.
     Return on Common Equity (ROE) = Net Income/ Common Equity
    Purpose: Measures the rate of return on a firm’s stockholders’ equity.

    TREND ANALYSIS
     The study of percentage changes in financial statement items over a
    period of time.
     Trend analysis provides a simple forecasting method.
     Used to estimate the likelihood of improvement or deterioration in its
    financial conditions.

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