Dividend The term dividend refers to that part of profit of a company which is distributed by the company among it’s shareholder.

Dividend policy According to Gitman defines “ The firm dividend policy represents a plan of action to be followed whenever the dividend decision must be made.

Dividend decision Dividend decision refers to the policy that the management formulates in regard to earnings for distribution as dividends among shareholders. Dividend decision determines the division of earnings between payments to shareholders and retained earnings.

Kinds of dividend policy 1) Regular dividend policy 2) Stable dividend policy 3) Irregular dividend policy 4) No dividend policy

Determinant’s of dividend policy Legal restriction Magnitude and trend of earning Desire and type of shareholders Nature of industry Age of the company Future financial requirements Govt. economic policy Taxation policy Inflation Control objectives Requirements of institutional investors Stability of dividend liquid resources

Dividend decision and valuation of firms The value of the firm can be maximized if the shareholders wealth is maximized . There are conflicting views regarding the impact of dividend decision on the valuation of firm , we have discussed below the views of 2 schools of thought under two groups. The irrelevance concept of dividend or the theory of irrelevance . The relevance concept of dividend or the theory of relevance .

The irrelevance concept of dividend 1) Residual approach 2) Modigliani and miller approach (M M Model) = it have expressed in the most comprehensive manner in support of the theory of irrelevance . The maintain that dividend policy has no effect on the market price of shares & the value of firm is determined by the earning capacity of the firm .

Mm model can be put in the form of the following formulas. Po = D1 +P1 1+Ke Where , Po = market price per shares at the beginning of the period . Or prevailing market price of a share D1 = dividend to be received at the end of period P1 =market price per share at the end of period Ke =cost of equity capital or rate of capitalization.

The value of P1 can be derived by the above equation as under , P1 =P0 (1+Ke)-D1 in such a case the number of shares to be issued can be computed with the help of the fallowing equation m =I(E-nD1) P1 further, the value of the firm can be ascertained with the help of the following formula . Np0 = (n+m)P1 -(I-E) 1+Ke

Where, m = no. of shares to be issued I = Investment required E = total earnings of the firm during the period P1 = market price per share at the end of period Ke = cost of equity capital n = no. of share outstanding at the of the period D1 = dividend to be paid at the end of the period nP0 = value of the firm

2) The relevance of concept of dividend 1) walter’s approach 2) Gordon’s approach

Walters approach P = D Ke-g Where, P = price of equity share D = Initial dividend per share Ke = cost of equity capital g = expected growth rate of earnings/ dividend Prof. walters has given the following formula to ascertain the market price of a share .

Gordon approach Gordon’s basic valuation formula can be simplified as under . P = E (I-b) Ke–br Where, P= price of share E= earning per share b= retention ratio Ke = cost of equity capital br= growth rate in r I,e. rate of return on investment of an all equity firm

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