Revise Lecture 31

Alternative Forms Of Dividends

In addition to the declaration of cash dividends, the firm has other options for distributing profits to shareholders. These options are the; 1.Stock dividend 2.Stock split 3.Stock repurchase

Stock Dividend A stock dividend occurs when the board of directors authorizes a distribution of common stock to existing shareholders. This has the effect of increasing the number of outstanding shares of the firm’s stock.

Stock Dividend There are several aspects of a stock dividend; 1.Conserves cash 2.Indicate higher future profits 3.Raises future dividends for investors 4.Has high psychological value 5.Retain proportional ownership for shareholders

Stock Splits A stock split is a change in the number of outstanding shares of stock achieved through a proportional reduction or increase in the par value of the stock. Only the par value and number of outstanding shares are effected. The amounts in the common stock contributed capital and retained earnings accounts do not change.

Stock Splits Several reasons may be offered for the splitting of a firm’s common stock as follows; 1.Reduction of market price of stock 2.Indication of growth 3.Reverse split

Repurchase of Stock A repurchase of stock occurs when a firm buys back outstanding shares of its own common stock. Firms repurchase stock for three major reasons; 1.For stock options 2.For acquisitions 3.For retiring the stock

Developing dividend policies The dividend decision should reflect the different factors as well as the firm’s present operating and financial position. The firm finds that it has a choice of several dividend policies to follow.

Developing dividend policies There are different dividend policies; 1.Steady dividends at the present level 2.Steady dividends at a lower level 3.Steady dividends at a higher level 4.Dividends fluctuating with earnings 5.Low regular dividends plus extra dividends 6.Eliminate the dividend entirely

Developing dividend policies Steady dividends at the present level Perhaps the most common dividend decision is to declare the same Rs dividend as paid last period. This meets the shareholders expectations for current income and is not likely to affect market price. This policy may result in shortages of funds during years when earnings have declined. For mature firms with unused borrowing capacity, this is not a serious drawback.

Developing dividend policies Steady dividends at a lower level The decision to reduce dividends would be considered if the firm has high profit investment opportunities and needs the funds to finance them. This might alienate stockholders seeking current income and affect the market price of the stock.

Developing dividend policies Steady dividends at higher level This is a decision to raise the regular dividend declared by the firm. It is warranted when the firm’s earnings have risen, when the earnings are stable at the higher level and when the firm does not need the excess earnings to finance growth. Frequently, the dividend announcement will favourably affect the price of the common stock.

Developing dividend policies Dividend fluctuating with earnings A less desirable policy is to allow the firm’s dividend level to fluctuate with its earnings. The advantage to this policy is that it affords management maximum flexibility in retaining funds to finance investment. This advantage is offset by the uncertainty of dividend payments, which results in relatively low prices for the common stock of firm using this approach

Developing dividend policies Low regular dividends plus extra dividends This policy would be appropriate for a firm with cyclical earnings and limited opportunities for growth. In a good earnings year, the firm would declare an extra dividend. This approach offers a great deal of flexibility to a firm that might otherwise have excess funds on hand.

Developing dividend policies Eliminate the dividend entirely Usually this is policy of last resort. There are two reasons for this dividend decision. First, the firm may be experiencing serious financial difficulties and may be unable to pay dividend. Second, the firm may have extremely attractive investment opportunities and may need to retain earnings to finance them.

Developing dividend policies Eliminate the dividend entirely In this case, the firm can minimize adverse effects on the stock price by carefully explaining the reason for the elimination of the dividend and by indicating that the dividend will be resumed as soon as the funds are no longer needed for expansion.

FDM Overview of Financial Management Financial securities and Markets A review of Financial Accounting

FDM Financial Statements Financial Analysis Leverage

FDM Introduction of Working Capital Management Working capital Cash Management Working Capital Stock Management

FDM Working Capital Debtors Management Valuation of the Firm Merger and Acquisitions Dividend Policies and decisions