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8/15/2019 Designing Dividend Policy(1)
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8/15/2019 Designing Dividend Policy(1)
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Firm’s Need for Funds
Shareholders’ Need for Income
2
OBJECTIVES OF DIVIDEND POLICY
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Firm’s Investment Opportunities and Financial Needs
Shareholders’ Expectations
Constraints on Paying ividends
◦ !egal restrictions◦ !i"uidity
◦ Financial condition and #orro$ing capacity
◦ %ccess to the capital mar&et
◦ 'estrictions in loan agreements◦ Inflation
◦ Control
(
PRACTICAL CONSIDERATIONS IN DIVIDEND
POLICY
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Constant ividend per Share or ividend 'ate)
Constant Payout)
Constant ividend per Share Plus Extra ividend)
*
STABILITY OF DIVIDENDS
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+
Constant dividend e! s"a!e olicy
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,
Dividend olicy o# constant ayo$t !atio
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Constant ividend Per Share Plus Extra ividend
Interim ividend
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'esolutions of investors uncertainty)
Investors’ desire for current income)
Institutional Investors’ 'e"uirement)
'aising %dditional Finances)
-
Signi#icance o# Sta%ility o# Dividends
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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 $ill #e reduced
• 4ar&et Price of the share should drop #y the amount of cash dividend paid
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3alchund !td) pays #onus shares in ratio 5657) %t the time of issue #onusshares8 the 4PS is 's (7) he #onus shares are issued at the mar&et price9
a premium of 's 27 over the face value of 's 57 each share
Bon$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?
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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
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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
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% 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$s S"a!es
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% share split is a method to increase the num#er of
outstanding shares through a proportional reduction in
the par value of the share) % share split affects only the
par value and the num#er of outstanding sharesB theshareholders’ total funds remain unaltered)
5*
S"a!e slit
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he follo$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
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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
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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
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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
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% 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.
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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-
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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-
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'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$y%ac-
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Not an effective defence against ta&eover
Shareholders do not li&e the #uy#ac&
!oss to the remaining shareholders
Signal of lo$ gro$th opportunities
2*
D!a,%ac-s o# t"e B$y%ac-