1. Dividend Theory

2. Issues in Dividend Policy Earnings to be Distributed – High Vs. Low Payout. Objective – Maximize Shareholders Return. Effects – Taxes, Investment and Financing Decision.

3. Relevance Vs. Irrelevance Walter's Model Gordon's Model Modigliani and Miller Hypothesis The Bird in the Hand Argument Informational Content

4. Walters Model Assumptions Valuation Optimum Payout Ratio Criticism

5. Assumptions Internal Financing Constant Return and Cost of Capital 100% Payout or Retention Constant EPS and DIV Infinite Time

6. Market price per share is the sum of the present value of the infinite stream of constant dividends and present value of the infinite stream of capital gains. Valuation

7. Example

8. Optimum Payout Ratio Growth Firms – Retain all earnings Normal Firms – Distribute all earnings Declining Firms – No effect

9. Criticism No external Financing Constant Rate of Return Constant opportunity cost of capital

10. Gordon's Model Assumptions Valuation Optimum Payout Ratio Criticism

11. Assumptions All Equity Firm No External Financing Constant Return and Cost of Capital Perpetual Earnings No Taxes Constant Retention Cost of Capital greater than Growth Rate

12. Valuation Market value of a share is equal to the present value of an infinite stream of dividends to be received by shareholders

13. Example

14. Optimum Payout Ratio Growth Firms – Retain all earnings Normal Firms – Distribute all earnings Declining Firms – No effect

15. The Bird in the Hand Investors are risk averters. They consider distant dividends as less certain than near dividends. Rate at which an investor discounts his dividend stream from a given firm increases with the futurity of dividend stream and

16. Modigliani and Miller According to M-M, under a perfect market situation, the dividend policy of a firm is irrelevant as it does not affect the value of the firm. They argue that the value of the firm depends on firm earnings which results from its investment policy. Thus when investment decision of the firm is given, dividend decision is of no significance.

17. Market Imperfections Tax Differential – Low Payout Clientele Flotation Cost Transaction and Agency Cost Information Asymmetry Diversification Uncertainty – High Payout Clientele Desire for Steady Income No or Low Tax on Dividends

18. Informational Content of Dividend …. In an uncertain world in which verbal statements can be ignored or misinterpreted, dividend action does provide a clear cut means of ‘making a statement’ that speaks louder than a thousand words. — Solomon

19. Practical Consideration in Paying Dividends Financial Need of company. Shareholders Expectations. Closely / Widely Held Company. Constraints on Paying Dividends. –Liquidity –Borrowing Capacity –Access to the Capital Markets –Restrictions in Loan Agreements

20. Stability of Dividends Constant Dividend per Share or Dividend Rate. Constant Payout. Constant Dividend per Share Plus Extra Dividend.

21. Forms of Dividends Cash Dividends Bonus Shares (Stock Dividend). –Advantages for Shareholders and Company.