EXECUTIVE SUMMARY

2010 was a year of a lot of new launches in India, some of which generated a lot of interest. From 3D televisions and HD set-top boxes, to tablet PCs with Smartphone features, the new launches created a lot of enthusiasm among both manufacturers and consumers. With many companies now trying to bring out low-priced models for new technologies to attract the masses, the consumer electronics market in India is getting ready to expand in a big way. Legislation encouraging growth The Government of India steadily reduced the excise duty on consumer products in the 2008-2010 period to help the industry fight post-recession blues. In addition, in the 2011 budget the government did not increase the excise duty, despite economic recovery. The corporate tax was also reduced in order to help the industry grow further. All in all, the Government of India is trying to come up with growth-orientated policies that will help the Indian consumer products industry to grow in a big way. Changing lifestyle impacting consumer electronics The changing lifestyle of people in India is having a significant impact on the consumer electronics market in India. Categories like digital TVs, converters, decoders and receivers, computers and peripherals, in-car entertainment devices and mobile phones are witnessing robust growth as they are status symbols. However, categories like video players and home audio and cinema are witnessing slow or declining growth rates as people are spending less and less time at home. Chained retailers and exclusive outlets growing faster With increased mobility of people across India in terms of work, the independent electronics specialists no longer enjoy the trust that they used to benefit from in the past because of years of service. The young generation is more comfortable shopping at exclusive company outlets or chained electronics specialists where such consumers can choose from the latest models, see demos and choose the model and brand as per their need without being pushed by a salesman. The independent retailers are losing out as people suspect them of indulging in fraudulent practices like changing parts and components. Multi-functional products will rule the market in the future Consumers are now looking for multiple features in a single device. They now want their mobile phones to allow complete internet connectivity, their cameras to have wi-fi connectivity so that they can instantly share their photos with friends and families, their PCs to have mobile phone functionality and their TVs to have internet connectivity. All

this is leading to a lot of technological advancements in consumer electronics and the market is expanding with many multi-functional products entering the market and many more expected to enter the market in the forecast period.

INTRODUCTION
The Finance Manager has to decide the dividend policy very carefully. A wrong dividend policy may put the company into financial troubles and the capital structure of the company may get unbalanced.

The growth of the company may get hampered if sufficient resources are not available to implement growth

programs.

The Finance Manager has to formulate the dividend policy in such a way, which coincides with the ultimate object of the finance function of maximizing the wealth of shareholders and value of the firm.

IMPORTANCE OF DIVIDEND POLICY

Profits earned by a company may be handled by it basically in two ways:

1. To distribute

the

profits

among

the

shareholders by

way

of

dividend.

2. To retain the profits in the business to be used in future.

There are no strict rules and guidelines available to decide as to what portion of the profits should be distributed by way of dividend and what portion should be retained in the business. As such, to decide the dividend policy may be one of the most trickiest and delicate decisions which the management of the company may be required to take.

If the management decides to retain a large portion of the profits in the business, funds required for future expansion and modernization needs of the company may be available to it on long-term basis, without any obligations to repay the same. The expansion or modernization programs may improve the earning capacity of the company in future, which may carry forward the growth of the company.

The company may be able to absorb the shocks of business fluctuations and adverse situations boldly. A strong and stable company may earn the confidence of the investors and creditors and funds may be available to it at reasonable rates conveniently.

As a result, the share prices and the value of the company will increase. Thus, though the shareholders are required to fore go the dividends in the short run, they get benefit in the long run.

On the other hand, if the management decides to distribute a large portion of profits by way of dividend, the company may be able to earn the confidence of the shareholders and may be able to attract the prospective investors to invest in the securities of the company.

Shareholders are necessarily interested in getting larger dividends immediately due to the time value of money and due to uncertainty regarding the future. Shareholders are thus attracted to the companies paying high dividends, due to which prices of the shares and value of the company increases.

Thus it can be seen, that both high retentions and high dividends may be desirable, but there is necessarily a reciprocal relationship between the retentions and dividends. The skill of the Finance Manager lies in striking the balance between these two extremes.

INDUSTRIAL PROFILE Indias Consumer Market Indias consumer market is riding the crest of the countrys economic boom. Driven by a young population with access to disposable incomes and easy finance options, the consumer market has been throwing up staggering figures. India officially classifies its population in five groups, based on annual household income. These groups are: Lower Income; three subgroups of Middle Income; and Higher Income. However, the rupee income classifications by themselves do not present a realistic picture of market potential for a foreign business enterprise, because of significant differences in purchase power parities of various currencies. In fact, the Indian rupee has a very high purchase power parity compared to its international exchange value. For instance, while the exchange rate of one US dollar is 48.50 Rupees, the domestic purchasing power of a US dollar in the US is closer to the purchasing power of Rs 6 in India, for equivalent needs and services. As a result, India ranks fifth in the world, on purchase power parity terms, despite being having low per capita national income (US$ 340 per capita). Consumer Classes Even discounting the purchase power parity factor, income classifications do not serve as an effective indicator of ownership and consumption trends in the economy. Accordingly, the National Council for Applied Economic Research (NCAER), Indias premier economic research institution, has released an alternative classification system based on consumption indicators, which is more relevant for ascertaining consumption patterns of various classes of goods. There are five classes of consumer households, ranging from the destitute to the highly affluent, which differ considerably in their consumption behavior and ownership patterns across various categories of goods. These classes exist in urban as well as rural households both, and consumption trends may differ significantly between similar income households in urban and rural areas.

Structure of the Indian Consumer Market Consumer Classes (Annual income 2001 Rs The rich (Rs.215, 000 and more)ii 1.2 2 54.6 6.2 90.9 416% 179% 2007 2010 Change

The Consuming Class (Rs. 45- 32.5 215,000) The Climbers (Rs. 22-45, 000) 54.1

71.6

74.1

37%

The Aspirants (Rs.16-22, 000)

44

28.1

15.3

-65%

The Destitute (below Rs. 16,000)

33.2

3.4

12.8

-61%

Total

164.8

180.7

199.2

21%

The target market segments considered for aspiration and lifestyle goods are the 35 million homes representing the consuming classes and the rich, or some 150 million people. It was the roughly 80 million households that comprise the upper aspiring to lower consuming that so excited the global market when they decided to enter the Indian market in the early 1990s. It was not until 1992, when the Indian market first began to open up post liberalization, that the MNCs started taking a closer look at the purchasing power of the countrys middle class. Inevitably, the first thing they saw was the massive volume of this potential market, rather than its cultural idiosyncrasies. Overview of Indias Consumer Durables Market

The Indian consumer durables segment can be segregated into consumer electronics (TVs, VCD players and audio systems etc.) and consumer appliances (also known as white goods) like refrigerators, washing machines, air conditioners (A/Cs), microwave ovens, vacuum cleaners and dishwashers. Most of the segments in this sector are characterized by intense competition, emergence of new companies (especially MNCs) and introduction of state-of-the-art models, price discounts and exchange schemes. MNCs continue to dominate the Indian consumer durable segment, which is apparent from the fact that these companies command more than 65 per cent market share in the colour television (CTV) segment. In consonance with the global trend, over the years, demand for consumer durables has increased with rising income levels, double-income families, changing lifestyles, availability of credit, increasing consumer awareness and introduction of new models. Products like air conditioners are no longer perceived as luxury products.

The biggest attraction for MNCs is the growing Indian middle class. This market is characterised with low penetration levels. MNCs hold an edge over their Indian counterparts in terms of superior technology combined with a steady flow of capital, while domestic companies compete on the basis of their well-acknowledged brands, an extensive distribution network and an

insight in local market conditions. One of the critical factors those influences durable demand is the government spending on infrastructure, especially the rural electrification programme. Given the government's inclination to cut back spending, rural electrification programmes have always lagged behind schedule. This has not favoured durable companies till now. Any incremental Corporate Catalyst India A report on Indian Consumer Durables Industry spending in infrastructure and electrification programmes could spur growth of the industry. The digital revolution is shaking up the consumer durables industry. With the advent of MP3 music files, personal video recorders, game machines, digital cameras, appliances with embedded devices, and a host of other media and services, it is no longer clear who controls which part of home entertainment. This has set off a battle for dominance, and the shake up is spanning the entire technology spectrum. Microsoft Corp. is spending billions on entertainment initiatives such as its Xbox video game console. Compaq and HP sell MP3 music players that plug into home-stereo systems. Apple Computer is positioning its new iMac as a digital-entertainment device. Sony is building Vaio computers that focus on integrating multimedia applications. Philips sells stereos that hook into a high-speed Internet connection to play music from the Web. More startups are trying to carve out profitable niches in digital music, video, and home networking. The industry is witnessing a number of strategic alliances, to develop a range of capabilities - electronic hardware, software and entertainment Content. As more consumers grow comfortable with technology, companies need to build simpler devices that offer more entertainment and convenience. These new machines need to work together readily, and should be as easy to set up and use as a telephone or a television. Consumerization of technology could be a major phenomenon over the next 5 to 10 years. This could hasten industry consolidation, as healthy companies gain market share by buying out weaker ones at attractive prices. Apart from steady income gains, consumer financing has become a major driver in the consumer durables industry. In the case of more expensive consumer goods, such as refrigerators, washing machines, colour televisions and personal computers,

retailers are joining forces with banks and finance companies to market their goods more aggressively. Among department stores, other factors that will support rising sales include a strong emphasis on retail technology, loyalty schemes, private labels and the subletting of floor space in larger stores to smaller retailers selling a variety of products and services, such as music and coffee. Growth Scenario Rising disposable income and declining prices of durables have resulted in increased volumes. An increase in disposable income is aided by an increase n the number of both double-income and nuclear families. The market for consumer durables (including entertainment electronics, communitarian and IT products) is estimated at Rs 32 billion (US $7.1 billion). The market is expected to grow at 10 to 12 per cent annually and is expected to reach Rs 60 billion (US$13.3 billion) by 2008. The urban consumer durables market is growing at an annual rate of seven to 10 per cent, the rural durables market is growing at 25 per cent annually. Some high-growth categories within this segment include mobile phones, TVs and music systems.

Television sets Personal computers Refrigerators Video recorders Consumer durables are expected to grow at 10-15 per cent in 2007-08, driven by the

growth in CTVs and air conditioners. Value growth of durables is expected to be higher than historical levels as price declines for most of the products are not expected to be very significant. Though price declines will continue, it will cease to be the primary demand driver. Instead the continuing strength of income demographics will support volume growth.

In economics, a durable good or a hard good is a good that does not quickly wear out, or more specifically, one that yields utility over time rather than being completely consumed in one use. Item like bricks or jewellery could be considered perfectly durable goods, because they should theoretically never wear out. Highly durable goods such as refrigerators, cars, or mobile phones usually continue to be useful for three or more years of use, so durable goods are typically characterized by long periods between successive purchases. Examples of consumer durable goods include cars, household goods (home appliances, consumer electronics, furniture, etc.), sports equipment, and toys. Consumer durables are the products whose life expectancy is at least 3 years. These products are hard goods that cannot be used up at once. The consumer durables sector can be segmented into consumer electronics, such as, VCD/DVD, home theatre, music players, colour televisions (CTVs), etc. and

white goods, such as, dish washers, air conditioners, water heaters, washing machines, refrigerators, etc. Non-durable goods or soft goods (consumables) are the opposite of durable goods. They may be defined either as goods that are immediately consumed in one use or ones that have a lifespan of less than 3 years. Examples of nondurable goods include fast-moving consumer goods such as cosmetics and cleaning products, food, fuel, office supplies, packaging and containers, paper and paper products, personal products, rubber, plastics, textiles, clothing and footwear. While durable goods can usually be rented as well as bought, nondurable goods can generally not be rented. While buying Durable goods comes under the category of Investment demand of Goods, buying Non-Durables comes under the category of Consumption demand of Goods. Before the liberalization of the Indian economy, only a few companies like Kelvinator, Godrej, Allyn, and Voltas were the major players in the consumer durables market, accounting for no less than 90% of the market. Then, after the liberalization, foreign players like LG, Sony, Samsung, Whirlpool, Daewoo, Aiwa came into the picture. Today, these players control the major share of the consumer durables market.

Consumer durables market is expected to grow at 10-15% in 2007-2008. It is growing very fast because of rise in living standards, easy access to consumer finance, and wide range of choice, as many foreign players are entering in the market. On the flip side, the presence of a large number of players in the consumer durables market sometimes results in excess supply. Durable goods are those which dont wear out quickly, yielding utility over time rather than at once. Examples of consumer durable goods include electronic equipment, home furnishings and fixtures, photographic equipment, leisure equipment and kitchen appliances. They can be further classified as either white goods, such as refrigerators, washing machines and air conditioners or brown goods such as blenders, cooking ranges and

microwaves or consumer electronics such as televisions and DVD players. Such big-ticket items typically continue to be serviceable for three years at least and are characterized by long inter-purchase times.

Classification of Consumer Durables Sector

1. Consumer Electronics includes VCD/DVD, home theatre, music players, color televisions (CTVs), cameras, camcorders, portable audio, Hi-Fi, etc. 2. White Goods include dishwashers, air conditioners, water heaters, washing machines, refrigerators, vacuum cleaners, kitchen appliances, nonkitchen appliances, microwaves, built-in appliances, tumble dryer, personal care products, etc. 3. Moulded Luggage includes plastics. 4. Clocks and Watches 5. Mobile Phones Performance In the past 10 years, the global market has witnessed a surge in demand as economies such as Brazil, Mexico, India and China have opened up and begun rapid development, welcoming globalization with lan. The consumer durables industry has always exhibited impressive growth despite strong competition and constant price cutting, and the first contraction since the 2001 dot-com bust has been due to the global recession. Given the strong correlation between demand for durables (both new and replacements) and income, the industry naturally suffered during the 2008-2009 period. However, projections for current year going forward are very optimistic, as consumers resume spending, and producers launch new enticing variants to grab new customers. Leading players include Sony Corporation, Toshiba Corporation, Whirlpool Corporation and Panasonic Corporation. Developing countries such as India and China have largely been shielded from the backlash of the recession, as consumers continued to buy basic appliances. In fact, China has been ranked the second-biggest market in the

world for consumer electronics. Despite the recession, their strong domestic economy and growing high-income population have buoyed demand leading to aggressive market growth. There is growing interest for new age products such as LCD-TVs and DVD players. Meanwhile, the penetration of the basic, largest dollar items such as ovens, washing machines and refrigerators is also increasing. India too, has witnessed a similar phenomenon, with the urban consumer durables market growing at almost 10 %p.a., and the rural durables market growing at 25% p.a. Some high-growth categories within this segment include mobile phones, TVs and music systems. The Indian consumer durables industry has witnessed a considerable change in the past couple of years. Changing lifestyle, higher disposable income coupled with greater affordability and a surge in advertising has been instrumental in bringing about a sea change in the consumer behavior pattern. Apart from steady income gains, consumer financing and hirepurchase schemes have become a major driver in the consumer durables industry. In the case of more expensive consumer goods, such as refrigerators, washing machines, color televisions and personal computers, retailers are joining forces with banks and finance companies to market their goods more aggressively. In addition, change in policy, such as the WTO FTA in 2005 resulted in zero customs duty on imports of all telecom equipment, thereby improving the pricing and affordability of imported goods.

SECTOR OUTLOOK
There has been strong competition between the major MNCs like Samsung, LG, and Sony. LG Electronics India Ltd. has announced its extension plan in 2006. The company is going to invest $250 million in India by 2011 and is planning to establish a manufacturing facility in Pune.

TCL Corporation is also planning to establish a $22 million manufacturing facility in India.

The Indian companies like Videocon Industries and Onida are also planning to expand. Videocon has acquired Electrolux brand in India. Also, with the acquisition of Thomson Displays by Videocon in Poland, China, and Mexico, the company is marking its international presence

COMPANY PROFILE

LG Electronics India Pvt Ltd Established in 1997, LG Electronics India Pvt. Ltd., is a wholly owned subsidiary of LG Electronics, South Korea . In India for a decade now, it is the market leader in comsumer durables ,and recognised as a leading technology innovator in the information technology and mobile communications business . It is the acknowledged trendsetter for the consumer durable industry in India with the fastest ever nationwide reach, latest global technology and product innovation. One of the most formidable brands, LGEIL has an impressive portfolio of Home Appliances, Consumer Durables, Digital Display products, GSM mobile phones and IT products.

VISION & BUSINESS GOALS

LG Electronics continues to pursue its 21st century vision of becoming a worldwide leader in digitalensuring customer satisfaction through innovative products and superior service while aiming to rank among the worlds top three electronics, information, and telecommunications firms by 2010.

LG Electronics pursues its 21st century vision of becoming a true global digital leader, making its customers worldwide delighted through its innovative digital products and services. Going forward LG India will synergize all activities in keeping with the global vision of becoming a global top 3 player in all business areas by following the Blue Ocean Strategy. The Blue Ocean strategy is based on the understanding that only flexible companies that adapt to lifecycle and industry changes will enjoy continued growth. The success of the Blue Ocean Strategy will focus on creating high growth & profit by focusing on five key areas at LG: Products, Business Model, Work, and Systems & People.

MAJOR SEGMENTS OF LG ELECTRONICS

COMPANY ANALYSIS

According to the Individual - Audited financial statement for the Year of 2011, total net operating revenues increased with 8.57%, from INR 10,959.9 tens of millions to INR 11,899.7 tens of millions. Operating result decreased from INR 606.6 tens of millions to INR 576.7 tens of millions which means -4.93% change. The results of the period decreased -14.31% reaching INR 297.7 tens of millions at the end of the period against INR 347.4 tens of millions last year. Return on equity (Net income/Total equity) went from 20.66% to 15.04%, the Return On Asset (Net income / Total Asset) went from 20.66% to 15.04% and the Net Profit Margin (Net Income/Net Sales) went from 3.17% to 2.50% when compared to the same period of last year. The Debt to Equity Ratio (Total Liabilities/Equity) was 100.00% compared to 100.00% of last year. Finally, the Current Ratio (Current Assets/Current Liabilities) went from 2.07 to 1.82 when compared to the previous year.

BRAND IDENTITY

LG is the brand that is Delightfully Smart. "Life's Good" slogan, and futuristic logo are a great representation of what we stand for.

Global, Tomorrow, Energy, Humanity and Technology are the pillars that this corporation is founded on; with the capital letters L and G positioned inside a circle to center our ideals above all else, humanity. The symbol mark stands for our resolve to establish a lasting relationship with, and to achieve the highest satisfaction for our customers.

The letters "L" and "G" in a circle symbolize the world, future, youth, humanity, and technology. Our philosophy is based on Humanity. Also, it represents LG's efforts to keep close relationships with our customers around the world. The symbol mark consists of two elements: the LG logo in LG Grey and the stylized image of a human face in the unique LG Red color. Red, the main color, represents our friendliness, and also gives a strong impression of LG's commitment to deliver the best. Therefore, the shape or the color of this symbol mark must never be changed.

Our logo is the fundamental visual expression used to identify LG. It expresses the quality and sophistication that is the hallmark of our products. It is simple, modern and distinctive. Consistent and proper usage of the logo is absolutely essential. The logo is symbolic of our steadfast reputation for excellence; therefore, any variation of the logo diminishes the visual identity of LG Electronics and its products. We have two versions of our logo: Corporate Logo and 3D Logo. The updated 3D Logo retains the heritage and equity of the Corporate Logo, while aligning with our new positioning. It was redrawn to strengthen the visual impact of our symbol mark and help communicate our attributes. CORPORATE LOGO

Applicable Items : - Stationery (Business Card, Letterhead, Envelope) - Office templates (Fax, Memo) - Awards - ID badges - Corporate signs

3D LOGO Applicable Items : - Advertising (Print, Online, TV and Outdoor) - Websites and microsites - Promotional literature (Leaflet, Brochures, etc) - Packaging - Retail signs and POPs - Shopping bags - Service vehicle

DESIGN Fast growth is the result of strategies designed to expand earnings quickly, while improving the growth rate in terms of monetary value rather than quantity.

ONE EYE Market leadership refers to the ability to achieve the "LG brand is No. 1" goal, thanks to its formidable market presence worldwide. UPPER RIGHT HAND SPACE Market leadership refers to the ability to achieve the "LG brand is No. 1" goal, thanks to its formidable market presence worldwide. COLORS Market leadership refers to the ability to achieve the "LG brand is No. 1" goal, thanks to its formidable market presence worldwide.

HISTORY

The history of LG Electronics has always been surrounded by the company's desire to create a happier, better life. LG Electronics was established in 1958 and has since led the way into the advanced digital era thanks to the technological expertise acquired by manufacturing many home appliances such as radios and TVs. LG Electronics has unveiled many new products, applied new technologies in the form of mobile devices and digital TVs in the 21st century and continues to reinforce its status as a global company.

1958 Founded as GoldStar

1960's Produces Korea's first radios, TVs, refrigerators, washing machines, and air conditioners

1995

Renamed LG Electronics Acquires US-based Zenith

1997 World's first CDMA digital mobile handsets supplied to Ameritech and GTE in U.S. Achieves UL certification in U.S. Develops world's first IC set for DTV

1998 Develops world's first 60-inch plasma TV

1999 Establishes LG Philips LCD, a joint venture with Philips

2000 Launches world's first Internet refrigerator Exports

synchronous IMT-2000 to Marconi Wireless of Italy Significant exports to Verizon Wireless in U.S.

2001 GSM mobile handset Exports to Russia, Italy, and Indonesia Establishes market leadership in Australian CDMA market Launches world's first Internet washing machine, air conditioner, and microwave oven

2002 Under LG Holding Company system, separates into LG Electronics and LG Corporation Full-scale export of GPRS color mobile phones to Europe Establishes CDMA handset production line and R&D center in China

2003 Enters Northern European and Middle East GSM handset market Achieves monthly export volume above 2.5 million units (July) Top global CDMA producer

2004 EVSB, the next-generation DTV transmission technology, chosen to be the U.S./Canada Industry standard by the US ATSC Commercializes world's first 55" all-in-one LCD TV Commercializes world's first 71" plasma TV Develops

world's first Satellite- and Terrestrial-DMB handsets

2005 Becomes fourth-largest supplier of the mobile handsets market worldwide Develops world's first 3G UMTS DMB handset, 3G-based DVB-Hand Media FLO DMB Phone with time-shift function and DMB notebook computer Establishes LG-Nortel, a network solution joint venture with Nortel

2006 LG Chocolate, the first model in LG's Black Label series of premium handsets, sells 7.5 million units worldwide Develops the first single-scan 60" HD PDP module and 100inch LCD TV Establishes strategic partnership with UL Acquires the world's first IPv6 Gold Ready logo

2007 Launches the industry's first dual-format, high-definition disc player and drive Launches 120Hz Full HD LCD TV Demonstrated the world-first MIMO 4G-Enabled

technologies with 3G LTE Won contract for GSMA's 3G campaign

2008 Introduces new global brand identity: "Stylish design and smart technology, in products that fit our consumer's lives." Posted No.1 spot in US frontloading washers in 5 consecutive quarters Unveiled the world's first Bluetooth headset combined mobile phone Unveiled the world's first Blu-ray network storage Developed the world's first LTE mobile modem chip Recorded over 100 million units of LG air conditioners in accumulated sales

2009 Became second-largest LCD TV provider worldwide Became third-largest supplier of mobile handsets market worldwide Became Global Partner and Technology Partner of Formula One

2010 Unveiled the worlds first and fastest dual-core smartphone,

LG OPTIMUS 2X Unveiled the worlds first full LED 3D TV

STRATEGIC ALLIANCES

LG Electronics is making technology advances and identifying business opportunities through various partnerships relationships with some of the world's leading companies. LG Electronics is striving to become number one in the world by collaborating in various business and technology fields and by strategic alliances with world famous companies. "Strategic alliance between corporations," in which companies with different infrastructures cooperate in the fast-developing 21st century business field, is of key significance in terms of strengthening the existing and creating a new industry. LG Electronics will do its best to create new products and services with an open mind, while developing new technologies and business fields through various partnerships with some of the world's most successful companies.

SWOT ANALYSIS OF LG ELECTRONICS

INTRODUCTION TO TOPIC
A business

organisation always aims at earning profits. The utilisation of profits

earned is a significant financial decision. The main whether issue the here is

profits

should be used by the owner(s) or retained and reinvested business decision in itself. does the This not

involve any problem is so far as the sole

proprietary business is concerned. In case of a partnership the agreement often provides for the basis of distribution of profits among partners. The decision-making is somewhat complex in the case of joint stock companies.

Since company is an artificial person, the decision regarding utilisation of profits rests with a group of people, namely the board of directors. As in any other types of organisation, the disposal of net earnings of a company involves either their retention in the business or their distribution to the owners (i.e., shareholders) in the form of dividend, or both. Yet the decision regarding distribution of disposable earnings to the shareholders is a significant one. The decision may mean a higher income, lower income or no income at all to the shareholders. Besides affecting the mood of the present shareholders, dividend may also influence the mood, behaviour and responses of prospective investors, stock exchanges and financial institutions because of its relationship with the worth of the company, which in turn affects the market value of its shares. The decision regarding dividend is taken by the Board of Directors and is then recommended to the shareholders for their formal approval in the annual general meeting of the company. Disposal of profits in the form of dividends can become a controversial-issue because

of conflicting interests of various parties like the directors, employees, shareholders, debenture holders, lending institutions, etc. Even among the shareholders there may be conflicts as they may belong to different income groups. While some may be interested in regular income, others may be interested in capital appreciation and capital gains. Hence, formulation of dividend policy is a complex decision. It needs careful consideration of various factors. One thing, however, stands out. Instead of an ad hoc approach, it is more desirable to follow a reasonably long-term policy regarding dividends.

CONCEPT OF DIVIDEND

Dividends are payments made by its

a corporation to

shareholder members. It is the portion of

corporate profits paid out When to a stockholders. corporation

earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be distributed to shareholders. There are two ways to distribute cash to shareholders: share repurchases or dividends. Many corporations retain a portion of their earnings and pay the remainder as a dividend.

A dividend is allocated as a fixed amount per share. Therefore, a shareholder receives a dividend in proportion to their shareholding. For the joint stock company, paying dividends is not an expense; rather, it is the division of after tax profits among shareholders. Retained earnings (profits that have not been distributed as dividends) are shown in the shareholder equity section in the company's balance sheet - the same as its issued share capital. Public usually pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a special dividend to distinguish it from the fixed schedule dividends.

Cooperatives, on the other hand, allocate dividends according to members' activity, so their dividends are often considered to be a pre-tax expense.

Dividends are usually paid in the form of cash, store credits (common among retail consumers' cooperatives) and shares in the company (either newly created shares or existing shares bought in the market.) Further, many public companies offer dividend reinvestment plans, which automatically use the cash dividend to purchase additional shares for the shareholder.

DIVIDEND DEFINITION

A dividend is a payment made by a company to its shareholders. A company can retain its profit for the purpose of re-investment in the business operations (known as retained earnings), or it can distribute the profit among its shareholders in the form of dividends.

A dividend is not regarded as expenditure; rather, it is considered a distribution of assets among shareholders. The majority of companies keep a component of their profits as retained earnings and distribute the rest as dividend.

FORMS OF PAYMENT

Cash dividends Stock or scrip dividends FORMS OF PAYMENT

Property dividends
Interim dividends Other dividends

Cash dividends (most common) are those paid out in currency, usually via electronic funds transfer or a printed paper check. Such dividends are a form of investment income and are usually taxable to the recipient in the year they are paid. This is the most common method of sharing corporate profits with the shareholders of the company. For each share owned, a declared amount of money is distributed. Thus, if a person owns 100 shares and the cash dividend is USD $0.50 per share, the holder of the stock will be paid USD $50.

Stock or scrip dividends are those paid out in the form of additional stock shares of the issuing corporation, or another corporation (such as its subsidiary corporation). They are usually issued in proportion to shares owned (for example, for every 100 shares of stock owned, a 5% stock dividend will yield 5 extra shares). If the payment involves the issue of new shares, it is similar to astock split in that it increases the total number of shares while lowering the price of each share without changing the market capitalization, or total value, of the shares held. (See also Stock dilution.)

Property dividends or dividends in specie (Latin for "in kind") are those paid out in the form of assets from the issuing corporation or another corporation, such as a subsidiary corporation. They are relatively rare and most frequently are securities of other

companies owned by the issuer, however they can take other forms, such as products and services.

Interim dividends are dividend payments made before a company's annual general meeting (AGM) and final financial statements. This declared dividend usually accompanies the company's interim financial statements.

Scrip dividend. A company may not have sufficient funds to issue dividends in the near future, so instead it issues a scrip dividend, which is essentially a promissory note (which may or may not include interest) to pay shareholders at a later date. This dividend creates a note payable.

Liquidating dividend. When the board of directors wishes to return the capital originally contributed by shareholders as a dividend, it is called a liquidating dividend, and may be a precursor to shutting down the business. The accounting for a liquidating dividend is similar to the entries for a cash dividend, except that the funds are considered to come from the additional paid-in capital account. Other dividends can be used in structured finance. Financial assets with a known market value can be distributed as dividends; warrants are sometimes distributed in this way. For large companies with subsidiaries, dividends can take the form of shares in a subsidiary company. A common technique for "spinning off" a company from its parent is to distribute shares in the new company to the old company's shareholders. The new shares can then be traded independently.

DIVIDEND POLICY : INTRODUCTION

The objective of corporate management usually is the maximisation of the market value of the enterprise i.e., its wealth. The market value of common stock of a company is influenced by its policy regarding allocation of net earnings into `plough back' and `payout'. While maximising the market value of shares, the dividend policy should be so oriented as to satisfy the interests of the existing shareholders as well as to attract the potential investors. Thus, the aim should be to maximise the present value of future dividends and the appreciation in the market price of shares.

Dividend policy is concerned with taking a decision regarding paying cash dividend in the present or paying an increased dividend at a later stage. The firm could also pay in the form of stock dividends which unlike cash dividends do not provide liquidity to the investors; however, it ensures capital gains to the stockholders. The expectations of dividends by shareholders helps them determine the share value, therefore, dividend policy is a significant decision taken by the financial managers of any company.

BACKGROUND OF CORPORATE DIVIDEND POLICY

The issue of corporate dividends has a long history and, as Frankfurter and Wood (1997) observed, is bound up with the development of the corporate form itself. Corporate dividends date back at least to the early sixteenth century in Holland and Great Britain when the captains of sixteenth century sailing ships started selling financial claims to investors, which entitled them to share in the proceeds, if any, of the voyages3. At the end of each voyage, the profits and the capital were distributed to investors, liquidating and ending the ventures life. By the end of the sixteenth century, these financial claims began to be traded on open markets in Amsterdam and were gradually replaced by shares of ownership. It is worth mentioning that even then many investors would buy shares from more than one captain to diversify the risk associated with this type of business.

At the end of each voyage, the enterprise liquidation of the venture ensured a distribution of the profits to owners and helped to reduce the possibilities of fraudulent practice by captains (Baskin, 1988). However, as the profitability of these ventures was established and became more regular, the process of liquidation of the assets at the conclusion of each voyage became increasingly inconvenient and costly. The successes of the ventures increased their credibility and shareholders became more confident in their management (captains), and this was accomplished by, among other things, the payment of generous dividends (Baskin, 1988). As a result, these companies began trading as going concern entities, and distributing only the profits rather than the entire invested capital. The emergence of firms as a going concern initiated the fundamental practice of firms to decide what proportion of the firms income (rather than assets) to return to investors and produced the first dividend payment regulations (Frankfurter and Wood, 1997). Gradually, corporate charters began to restrict the payments of dividends

to the profits only.

The ownership structure of shipping firms gradually evolved into a joint stock company form of business. But it was chartered trading firms more generally that adopted the joint stock form. In 1613, the British East India Company issued its first joint stock shares with a nominal value. No distinction was made, however, between capital and profit (Walker, 1931, p.102). In the seventeenth century, the success of this type of trading company seemed poised to allow the spread of this form of business organization to include other activities such as mining, banking, clothing, and utilities. Indeed, in the early 1700s, excitement about the possibilities of expanded trade and the corporate form saw a speculative bubble form, which collapsed spectacularly when the South Sea Company went into bankruptcy. The Bubble Act of 1711 effectively slowed, but did not stop, the development of the corporate form in Britain for almost a century (Walker, 1931).

In the early stages of corporate history, managers realized the importance of high and stable dividend payments. In some ways, this was due to the analogy investors made with the other form of financial security then traded, namely government bonds. Bonds paid a regular and stable interest payment, and corporate managers found that investors preferred shares that performed like bonds (i.e. paid a regular and stable dividend). For example, Bank of North America in 1781 paid dividends after only six months of operation, and the bank charter entitled the board of directors to distribute dividends regularly out of profits. Paying consistent dividends remained of paramount importance to managers during the first half of the 19th century (Frankfurter and Wood, 1997, p.24)

In addition to the importance placed by investors on dividend stability, another issue of modern corporate dividend policy to emerge early in the nineteenth century was that dividends came to be seen as an important form of information. The scarcity and unreliability of financial data often resulted in investors making their assessments of corporations through their dividend payments rather than reported earnings. In short, investors were often faced with inaccurate information about the

performance of a firm, and used dividend policy as a way of gauging what managements views about future performance might be. Consequently, an increase in divided payments tended to be reflected in rising stock prices. As corporations became aware of this phenomenon, it raised the possibility that managers of companies could use dividends to signal strong earnings prospects and/or to support a companys share price because investors may read dividend announcements as a proxy for earnings

growth.

To summarise, the development of dividend payments to shareholders has been tied up with the development of the corporate form itself. Corporate managers realized early the importance of dividend payments in satisfying shareholders expectations. They often smoothed dividends over time believing that dividend reductions might have unfavourable effects on share price and therefore, used dividends as a device to signal information to the market. Moreover, dividend policy is believed to have an impact on share price. Since the 1950s, the effect of dividend policy on firm value and other issues of corporate dividend policy have been subjected to a great debate among finance scholars. The next section considers these developments from both a theoretical and an empirical point of view.

Types of Dividend Policies The following are various types of dividend policies (1) Policy of No Immediate Dividend (2) Stable Dividend Policy. (3) Regular Dividend plus Extra Dividend Policy. (4) Irregular Dividend Policy. (5) Regular Stock Dividend Policy. (6) Regular Dividend plus Stock Dividend Policy. (7) Liberal Dividend Policy. We discuss these policies in detail: (1) Policy of No Immediate Dividend: Generally, management follows a policy of paying no immediate dividend in the beginning of its life, as it requires funds for growth and expansion. In case, when the outside funds are costlier or when the access to capital market is difficult for the company and shareholders are ready to wait for dividend for some time, this policy is justified, provided the company is growing fast and it requires a good deal of amount for expansion. But such a policy is not justified for a long time, as the shareholders are deprived of the dividend and the retained earnings built up which will attract attention of laborers, consumers etc. It would be better if the period of dividend is followed by issue of bonus shares, so that later on rate of dividend is maintained at a reasonable level. (2) Regular or Stable Dividend Policy: When a company pays dividend regularly at a fixed rate, and maintains it for a considerably long time even though the profits may fluctuate, it is said to follow regular or stable dividend policy. Thus stable dividend policy means a policy of paying a minimum amount of dividend every year regularly. It raises the prestige of the company in the eyes of the investors. A firm paying stable dividend can satisfy its shareholders and can enhance its credit standing in the market. Not only that the dividend must be regularly paid but the dividend must be stable. It may be fixed amount per share or a fixed percentage of net profits or it may be total fixed amount of dividend on all the shares etc. The benefits of stable dividend policy are (i) it helps in raising long-term finance. When the company tries to raise finance in future, the investors would examine the dividend record of the company. The investors would not hesitate to invest in company with stable dividend policy. (2) As it will enhance the prestige of the company, the price of its shares would remain at a high level. (3) The shareholders develop confidence in management. (4) It makes long-term planning easier. (The detailed discussion of this policy follows in the next paragraph. (3) Regular Dividend plus Extra Dividend Policy. A firm paying regular dividends would continue with its pay out ratio. But when the earnings exceed the normal level, the directors would pay extra dividend in addition to the regular dividend. But it would be named 'Extra dividend', as it should not give an impression that the company has enhanced rate of regular dividend, This would give an impression to shareholders that the company has given extra dividend because it has earned extra profits and would not be

repeated when the business earnings become normal. Because of this policy, the company's prestige and its share values will not be adversely affected. Only when the earnings of the company have permanently increased, the extra dividend should be merged with regular normal dividend and thus rate of normal dividend should be raised. Besides, the extra dividend should not be abruptly declared, but the shareholders should have some idea in advance, so that they may sell their shares, if they like. This system is not found in India. (4) Irregular Dividend Policy: When the firm does not pay out fixed dividend regularly, it is irregular dividend policy. It changes from year to year according to changes in earnings level. This policy is based on the management belief that dividend should be paid only when the earnings and liquid position of the firm warrant it. This policy is followed by firms having unstable earnings, particularly engaged in luxury goods. (5) Regular Stock Dividend Policy: When a firm pays dividend in the form of shares instead of cash regularly for some years continuously, it is said to follow this policy. We know stock dividend as bonus shares. When a company is short of cash or is facing liquidity crunch, because a large part of its earnings are blocked in high level of receivables or when the company is need of cash for its modernization and expansion program, it follows this policy. It is not advisable to follow this policy for a long time, as the number of shares will go on increasing, which would result in fall in earnings per share. This would adversely affect the credit standing of the firm and its share values will go down. (6) Regular Dividend plus Stock Dividend Policy: A firm may pay certain amount of dividend in cash and some dividend is paid in the form of shares (stock). Thus, the dividend is split in to two parts. This policy is justified when (1) The company wants to maintain its policy of regular dividend and yet (2) It wants to retain some part of its divisible profit with it for expansion. (3) It wants to give benefit of its earnings to shareholders but has not enough liquidity to give full dividend in cash. All the limitations of paying regular stock dividends apply to this policy. (7) Liberal Dividend Policy: It is a policy of distributing a major part of its earnings to its shareholders as dividend and retains a minimum amount as retained earnings. Thus, the ratio of dividend distribution is very large as compared to retained earnings. The rate of dividend or the amount of dividend is not fixed. It varies according to earnings. The higher is the profit, the higher will be the rate of dividend. In years of poor earnings, the rate of dividend will be lower. In fact, it is the policy of Irregular Dividend.

Dividend Policy Goals

There are several factors, which influence the determination of the dividend policy. As such no two companies may follow exactly similar dividend policies. The dividend policy has to be tailored to the particular circumstances of the company. However, the following aspects have general applicability:

Dividend policy should be analysed in terms of its effect on the value of the company. Investment by the company in new profitable opportunities creates value and when a company foregoes an attractive investment, shareholders incur an opportunity loss. Dividend, investment and financing decisions are interdependent and there is often a trade off. Dividend decision should not be treated as a short run residual decision because ' variability of annual earnings may cause even a zero dividend in a particular year. This m a y have serious repercussions for the company and m a y result in the delisting of its share for the purpose of dealings on any approved stock exchange. A workable compromise is to treat dividends as a long-run residual to avoid undesirable variations in payout. This needs financial planning over a fairly long time horizon. Whatever dividend policy is adopted by the company, the general principles guiding the dividend policy should, as far as possible, be communicated clearly to investors who m a y then take their decisions in terms of their own preferences and needs. Erratic and frequent changes in dividends should be avoided. Reduction in the rate of dividend is a painful thing for the shareholders to bear. The management will find it hard to convince the shareholders of the desirability of a lower dividend for the sake of preserving their future interests.

FACTORS AFFECTING DIVIDEND DECISION

1. Stability of Earnings. The nature of business has an important bearing on the dividend policy. Industrial units having stability of earnings may formulate a more consistent dividend policy than those having an uneven flow of incomes because they can predict easily their savings and earnings. Usually, enterprises dealing in necessities suffer less from oscillating earnings than those dealing in luxuries or fancy goods.

2. Age of corporation. Age of the corporation counts much in deciding the dividend policy. A newly established company may require much of its earnings for expansion and plant improvement and may adopt a rigid dividend policy while, on the other hand, an older company can formulate a clear cut and more consistent policy regarding dividend.

3. Liquidity of Funds. Availability of cash and sound financial position is also an important factor in dividend decisions. A dividend represents a cash outflow, the greater the funds and the liquidity of the firm the better the ability to pay dividend. The liquidity of a firm depends very much on the investment and financial decisions of the firm which in turn determines the rate of expansion and the manner of financing. If cash position is weak, stock dividend will be distributed and if cash position is good, company can distribute the cash dividend. 4. Extent of share Distribution. Nature of ownership also affects the dividend decisions. A closely held company is likely to get the assent of the shareholders for the suspension of dividend or for following a conservative dividend policy. On the other hand, a company having a good number of shareholders widely distributed and forming low or medium income group, would face a great difficulty in securing such assent because they will emphasise to distribute higher dividend. 5. Needs for Additional Capital. Companies retain a part of their profits for strengthening their financial position. The income may be conserved for meeting the increased requirements of working capital or of future expansion. Small companies usually find difficulties in raising finance for their needs of increased working capital for expansion programmes. They having no other alternative, use their ploughed back profits. Thus, such Companies distribute dividend at low rates and retain a big part of profits.

6. Trade Cycles. Business cycles also exercise influence upon dividend Policy. Dividend policy is adjusted according to the business oscillations. During the boom, prudent management creates food reserves for contingencies which follow the inflationary period. Higher rates of dividend can be used as a tool for marketing the securities in an otherwise depressed market. The financial solvency can be proved and maintained by the companies in dull years if the adequate reserves have been built up.

7. Government Policies. The earnings capacity of the enterprise is widely affected by the change in fiscal, industrial, labour, control and other government policies. Sometimes government restricts the distribution of dividend beyond a certain percentage in a particular industry or in all spheres of business activity as was done in emergency. The dividend policy has to be modified or formulated accordingly in those enterprises.

8. Taxation Policy. High taxation reduces the earnings of he companies and consequently the rate of dividend is lowered down. Sometimes government levies dividend-tax of distribution of dividend beyond a certain limit. It also affects the capital formation. N India, dividends beyond 10 % of paid-up capital are subject to dividend tax at 7.5 %.

9. Legal Requirements. In deciding on the dividend, the directors take the legal requirements too into consideration. In order to protect the interests of creditors an outsiders, the companies Act 1956 prescribes certain guidelines in respect of the distribution and payment of dividend. Moreover, a company is required to provide for depreciation on its fixed and tangible assets before declaring dividend on shares. It proposes that Dividend should not be distributed out of capita, in any case. Likewise, contractual obligation should also be fulfilled, for example, payment of dividend on preference shares in priority over ordinary dividend. 10. Past dividend Rates. While formulating the Dividend Policy, the directors must keep in mind the dividend paid in past years. The current rate should be around the average past rat. If it has been abnormally increased the shares will be subjected to speculation. In a new concern, the company should consider the dividend policy of the rival organisation. 11. Ability to Borrow. Well established and large firms have better access to the capital market than the new Companies and may borrow funds from the external sources if there arises any need. Such Companies may have a better dividend pay-out ratio. Whereas smaller firms have to depend on their internal sources and therefore they will have to built up good reserves by reducing the dividend pay out ratio for meeting any obligation requiring heavy funds. 12. Policy of Control. Policy of control is another determining factor is so far as dividends are concerned. If the directors want to have control on company, they would not like to add new shareholders and therefore, declare a dividend at low rate. Because by adding new shareholders they fear dilution of control and diversion of policies and programmes of the existing management. So they prefer to meet the needs through retained earing. If the directors do not bother about the control of affairs they will follow a liberal dividend policy. Thus control is an influencing factor in framing the dividend policy.

13. Repayments of Loan. A company having loan indebtedness are vowed to a high rate of retention earnings, unless one other arrangements are made for the redemption of debt on maturity. It will naturally lower down the rate of dividend. Sometimes, the lenders (mostly institutional lenders) put restrictions on the dividend distribution still such time their loan is outstanding. Formal loan contracts generally provide a certain standard of liquidity and solvency to be maintained. Management is bound to hour such restrictions and to limit the rate of dividend payout. 14. Time for Payment of Dividend. When should the dividend be paid is another consideration. Payment of dividend means outflow of cash. It is, therefore, desirable to distribute dividend at a time when is least needed by the company because there are peak times as well as lean periods of expenditure. Wise management should plan the payment of dividend in such a manner that there is no cash outflow at a time when the undertaking is already in need of urgent finances. 15. Regularity and stability in Dividend Payment. Dividends should be paid regularly because each investor is interested in the regular payment of dividend. The management should, inspite of regular payment of dividend, consider that the rate of dividend should be all the most constant. For this purpose sometimes companies maintain dividend equalization Fund.

PROCEDURE FOR DECLARATION AND PAYMENT OF DIVIDENDS

Recommendation by the Board Resolution at the annual general meeting

Payment from profits of the Company Payment within 42 days of declaration Unpaid dividend Permission of RBI Declaration of Interim Dividend Dividend Distribution Tax (DDT)

Step 1 : Recommendation by the Board

Dividend can be declared only on the recommendation of the board of directors ("Board") of the company. The members cannot on their own declare any dividend. The Board, after consideration and approval of the financial statements of the company, determines the rate of dividend to be declared and recommends the same to the shareholders.

Step 2 : Resolution at the annual general meeting

Dividend is declared by a company by a resolution passed at its AGM after sanctioning the rate of dividend recommended by the Board. The members may declare a lower rate of dividend than what is recommended by the Board but they have no power to increase the amount or rate so recommended by the Board.

Step 3 : Payment from profits of the Company

It has to be ensured that dividend is paid out of the profits of the company after providing for depreciation and if no depreciation is provided, ensure that approval was obtained from the Central Government before declaring the dividend.

Step 4 : Payment within 42 days of declaration

(a)

The amount of dividend including interim dividend shall be deposited in a

separate bank account within 5 days from the date of declaration of such dividend.

(b)

Dividend should be paid out of such bank account within 42 days of declaration of

such dividend.

(c)

Failure to comply with this requirement subjects the company to penalty under the

Act unless such failure is because of the reason excepted under the Act.

Step 5 : Unpaid dividend

(a)

Unpaid Dividend Account

The amount of dividend which remains unpaid or unclaimed after 30 days from the date of declaration should be transferred to a special dividend account, to be called Unpaid

Dividend Account' of the company within 7 days from the expiry of the 30 days period provided for payment of dividend.

The company in default of this provision shall pay, from the date of such default, 12% interest on the amount not transferred to the said account, which interest shall ensure to the benefit of the members, in proportion to the amount remaining unpaid to them.

(b)

Investor Education and Protection Fund

Any amount in the Unpaid Dividend Account of the company which remains unclaimed and unpaid for a period of 7 years from the date of transfer of such amount to the Unpaid Dividend Account should be transferred to the Investor Education and Protection Fund, within 30 days of the expiry of 7 years from the date of transfer to the Unpaid Dividend Account. But prior to such transfer the company must have given individual intimation to the concerned members of the amount of dividend remaining unclaimed which is liable to be transferred to such fund at least 6 months before the due date of such transfer.

Step 6 : Permission of RBI

The permission of RBI is required in case of payment of dividend to non- resident shareholders.

Step 7 : Declaration of Interim Dividend

(a)

Interim dividend can be declared by the Board without requiring the approval of

the members of the company. However interim dividend can be paid only if authorized by the articles of association of the company.

(b)

A mere resolution declaring interim dividend does not create any liability and may

be rescinded at any time before actual payment. (distinction between interim and final dividend)

Step 8 : Dividend Distribution Tax (DDT)

The DDT is liable to be paid by the company at the rate of 15.0% (plus a surcharge of 10% and education cess at the rate of 3% on dividend distribution tax and surcharge) on the total amount distributed as a dividend. Thus the effective rate of dividend distribution

tax is 16.995%.

In addition it is pertinent to note that dividends are not taxable in India in the hands of the shareholders.

DIVIDEND POLICY

Dividend policy is concerned with taking a decision regarding paying cash dividend in the present or paying an increased dividend at a later stage. The firm could also pay in the form of stock dividends which unlike cash dividends do not provide liquidity to the investors, however, it ensures capital gains to the stockholders. The expectations of dividends by shareholders helps them determine the share value, therefore, dividend policy is a significant decision taken by the financial managers of any company.

Dividend policy

Relevance model of dividend policy (direct effect on the value of the firm)

Irrelevance model of dividend policy ( does not affect the firm's value)

Walter's model

Gordon's Model

Traditional theorem

ModiglianiMiller theorem

RELEVANCE MODEL OF DIVIDEND POLICY

Dividends paid by the firms are viewed positively both by the investors and the firms. The firms which do not pay dividends are rated in oppositely by investors thus affecting the share price. The people who support relevance of dividends clearly state that regular dividends reduce uncertainty of the shareholders i.e. the earnings of the firm is discounted at a lower rate, ke thereby increasing the market value. However, its exactly opposite in the case of increased uncertainty due to non-payment of dividends. Two important models supporting dividend relevance are given by Walter and Gordon.

WALTER'S MODEL James E. Walter's model shows the relevance of dividend policy and its bearing on the value of the share.

Assumptions of the Walter model 1. Retained earnings are the only source of financing investments in the firm, there is no external finance involved. 2. The cost of capital, k e and the rate of return on investment, r are constant i.e. even if new investments decisions are taken, the risks of the business remains same. 3. The firm's life is endless i.e. there is no closing down. Basically, the firm's decision to give or not give out dividends depends on whether it has enough opportunities to invest the retain earnings i.e. a strong relationship between investment and dividend decisions is considered.

Model description

Dividends paid to the shareholders are re-invested by the shareholder further, to get higher returns. This is referred to as the opportunity cost of the firm or the cost of capital, ke for the firm. Another situation where the firms do not pay out dividends, is when they invest the profits or retained earnings in profitable opportunities to earn returns on such investments. This rate of return r, for the firm must at least be equal to ke. If this happens then the returns of the firm is equal to the earnings of the shareholders if the dividends were paid. Thus, its clear that if r, is more than the cost of capital ke, then the

returns from investments is more than returns shareholders receive from further investments.

Walter's model says that if r<ke then the firm should distribute the profits in the form of dividends to give the shareholders higher returns. However, if r>k e then the investment opportunities reap better returns for the firm and thus, the firm should invest the retained earnings. The relationship between r and k are extremely important to determine the dividend policy. It decides whether the firm should have zero payout or 100% payout. In a nutshell :

If r>ke, the firm should have zero payout and make investments. If r<ke, the firm should have 100% payouts and no investment of retained earnings. If r=ke, the firm is indifferent between dividends and investments.

Mathematical representation

Walter has given a mathematical model for the above made statements :

where,

P = Market price of the share D = Dividend per share r = Rate of return on the firm's investments ke = Cost of equity E = Earnings per share'

The market price of the share consists of the sum total of:

the present value if an infinite stream of dividends the present value of an infinite stream of returns on investments made from retained earnings.

Therefore, the market value of a share is the result of expected dividends and capital gains according to Walter.

Criticism Although the model provides a simple framework to explain the relationship between the market value of the share and the dividend policy, it has some unrealistic assumptions. 1. The assumption of no external financing apart from retained earnings, for the firm make further investments is not really followed in the real world. 2. The constant r and ke are seldom found in real life, because as and when a firm invests more the business risks change.

GORDON'S MODEL

Myron J. Gordon has also supported dividend relevance and believes in regular dividends affecting the share price of the firm.

Assumptions of the Gordon model Gordon's assumptions are similar to the ones given by Walter. However, there are two additional assumptions proposed by him : 1. The product of retention ratio b and the rate of return r gives us the growth rate of the firm g. 2. The cost of capital ke, is not only constant but greater than the growth rate i.e. ke>g.

Model description Investor's are risk averse and believe that incomes from dividends are certain rather than incomes from future capital gains, therefore they predict future capital gains to be risky propositions. They discount the future capital gains at a higher rate than the firm's earnings thereby, evaluating a higher value of the share. In short, when retention rate increases, they require a higher discounting rate. Gordon has given a model similar to Walter's where he has given a mathematical formula to determine price of the share.

Mathematical representation The market price of the share is calculated as follows:

where,

P = Market price of the share E = Earnings per share b = Retention ratio (1 - payout ratio) r = Rate of return on the firm's investments ke = Cost of equity br = Growth rate of the firm (g)

Therefore the model shows a relationship between the payout ratio, rate of return, cost of capital and the market price of the share.

IRRELEVANCE MODEL OF DIVIDEND POLICY TRADITIONAL APPROACH

Many finance and economics specialists believe that cash dividend policy is unimportant because it is not relevant and does not affect the owners wealth. The source of this belief is a study conducted by Miller and Modigliani (1961). This study concludes that dividend policy has no effect on a companys value, and therefore managers will not be able to maximize owners wealth through a dividend policy.

The irrelevance proposition concept for dividend policy on the owners wealth stems from the fundamental idea that companies which distribute continuous high cash dividends to shareholders therefore secure a higher share price (Lumby and Jones, 1999). As a result, investors capital gains are very limited in such a company as they receive the same returns as other investors holding another companys shares with low dividends while its prices become high because of the retained earnings. These investors obtain high capital gains which compensates the limited cash dividends. In both cases, the shareholders wealth is the profits obtained by cash dividend plus capital gains realized from rising share prices. In case there are no taxes or where taxes on capital gains are equal to dividends taxes, the investor will not be affected, whether or not the company has paid cash dividends or kept the profit in retained earnings and the investor has

obtained capital gains when selling his/her shares as a result of the rise in the price of the companys shares through undistributed profits and with no change in the other effective factors.

According to the irrelevance proposition, dividend policy affects only the level of external financing required to finance future projects with a positive net present value. This means that each dollar distributed to shareholders represents a capital loss of a dollar. According to this hypothesis, the only constraint on the companys market value is the companys investment policy, not which dividend policy the company follows. This is because the investment policy is responsible for future profits (Miller and Modigliani, 1961). Accordingly, the companys decision on the distribution of cash or non-profit distribution would not affect the market value of the company and therefore would not affect the owners wealth. This hypothesis recommends that managers should give greater importance to the investment policy and let the dividend policy follow the investment policy; which is known the Residual Dividend Policy.

The advocates of the irrelevance proposition hypothesis (Black and Scholes, 1974, Miller and Scholes, 1978, Merton and Myron, 1982, Merton, 1986, Peter, 1996) adopt the idea that an investor can build his/her own cash dividend policy regardless of the companys dividend policy. This is known as the Homemade Dividend (Miller and Modigliani, 1961) where investors can obtain income through selling part of his/her shares equal to the value of cash profits that could have been distributed by the company if the company does not have cash dividends and the investor himself wishes to receive cash dividends to meet his consumer needs. The investor may wish also to reinvest cash dividends distributed by the company if he/she shows no desire for cash dividends. By following this method, the investor will not be affected by the companys dividend policy, and therefore would not be compelled to abandon the stocks of companies following a dividend policy which is not consistent with his/her wishes.

One of the criticisms of the irrelevance proposition hypothesis is that it cannot be practically acceptable. The theory of building a dividend policy for each investor based on an efficient market, with no transaction costs for buying and selling, is not practical (Dempsey and Laber, 1992). In addition, the investor will pay taxes on cash dividends or capital gains, making the adoption of a specific dividend policy for each investor a costly process. In addition, investment in companies whose cash dividend policy is consistent with investors needs is less expensive than building a special dividend policy. Irrelevance proposition hypothesis is built on the basis that the investor is rational when

taking his/her decisions. However, psychological tests prove that human beings are not one hundred per cent rational with regard to decision-making. Shefrin and Statman (1984) in their study argue that investors have an unreasonable preference regarding profit dividends; this is not consistent with irrelevance proposition hypothesis. Irrelevance proposition hypothesis is also criticised for assuming equality between cash dividends and capital gains. The two are not equal as a cash dividend is cash in the hand without any uncertainty risk, while a capital gain is cash in the future with considerable risk. So, how can they be equal?

The irrelevance proposition hypothesis has been built on a set of assumptions that have already been indicated. It is understood here that any change in these assumptions would naturally lead to a change in the basic hypothesis and therefore to a change in the results. Accordingly, and in practical terms, financial markets in general do not agree with these assumptions

MODIGLIANI APPROACH:

AND

MILLER

Value of the firm (i.e wealth of share holders) Firm's earnings. Firm's investment policy and not on dividend policy.

Depends on

Depends on

Franco Modigliani was awarded Nobel prize in 1985 and Merton Miller in 1990 (along with Markowitz and Sharpe). M&M have theorised on the irrelevance of the capital structure, and a corollary, irrelevance of the dividend payout ratio to the value of the firm. Like several financial theories, M&M hypothesis is based on the argument of efficient capital markets. In addition, we believe that a firm has two options:

(a) It retains earnings and finances its new investment plans with such retained earnings; (b) It distributes dividends, and finances its new investment plans by issuing new shares.

The intuitive background of the M&M approach is extremely simple, and in fact, almost self- explanatory. It is based on the following propositions:

Why would a company retain earnings? Only tenable reason is that the company has investment opportunities. If the company does not retain earnings, where does it finance those investment opportunities from? We may assume a

debt issuance, but then as M&M otherwise propounded irrelevance of the capital structure, they see a parity between debt and equity, and hence, it does not make a difference whether the new investments are funded by equity or debt. So, let us assume that the new growth plans are funded by equity. Shareholders price the equity shares of the company to take into account the earnings and the retentions of the company. If the company distributes dividends, the shareholders take into account that fact in pricing of the shares; if the company does not distribute dividends, that is also reflected in the pricing of the shares. If dividends are distributed, the financing needs of the company will be funded by issuing new shares. The issue price of these shares will compensate for the fact that the dividends have been distributed. That is to say, the market price of the share will remain unaffected by whether the dividends have been distributed or not.

Let us take a one year time horizon to understand the indifference argument of M&M. We use the following new notations:
Po P1 D1 n m I X : Price of the equity share at point 0 : Price of the equity share at point 1, that is, end of period 1 : Dividend per share being paid in period 1 : existing number of issued shares : new shares to be issued : Investment needs of the company in year 1 : Profits of the firm year in 1

The relation between the price at the beginning of the year (Po), and that at the end of the year (P1) is the simple question of discounted value at the shareholders expected rate of return (KE). Hence,
Po = (P1 +D1) / (1+(KE) (1)

Equation (1) is quite easy to understand. Shareholders have got a cash return equal to D1 at the end of Year 1, and the share is still worth P1. Hence, discounted at the cost of equity, the discounted value is the price at the beginning of the period. Alternatively, it may also be stated that the

P1 = (P0 )* (1+(KE) - D1

(2)

That is to say, if the company declares dividends, the price the end of year 1 comes down to the effect of the distribution.

Equation (1) can be manipulated. By multiplying both sides by n, and adding a selfcancelling number m, we may write (1) as follows:
nPo = [(n+m)P1 -mP1 +nD1)]/(1+(KE) (3)

Note that we have multiplied both sides by n, and the added number m along with m is cancelled by deducting the same outside the brackets.

mP1

represents the new share capital raised by the company to finance its investment

needs. How much share capital would the company need to raise? Given the investment needs I and the profits X, the new capital issued will be given by the following:
mP1 = I (X - nD1)

(4)

Again, this is not difficult to understand, as the total amount of profit of the company is X, and the total amount distributed as dividends is nD1. Hence, the company is left with a funding gap as shown by equation (4).

If the value of mP1 is substituted in Equation (3), we have the following:

nPo = [(n+m)P1 {I (X - nD1)}+nD1)]/(1+(KE) As nD1 would cancel out, we will be left with the following: nPo = [(n+m)P1 I + X] /(1+(KE) (6) (5)

Since nPo

is total value of the stock at point 0, it is seen from Equation (6) that dividend

is not a factor in that valuation at all.

assumptions:

 Perfect capital markets: The firm operates in perfect capital markets where investors behave rationally, information is freely available to all and transactions and flotation costs do no exist. Perfect capita; markets also imply that no investor is large enough to affect the market price of a share. No taxes: taxes do no exist or there are no differences in the tax rates applicable to capital gains and dividends. This means that investors value a rupee of dividend as much as a rupee of capital gains. Investment opportunities are known: the firm is certain with its investment opportunities and future profits. No risk: Risk of uncertainty does not exist i.e. investors are able to forecast future prices and dividends with certainty, and one discount rate is appropriate for all securities and all time periods. Thus, r=k for all t

According to M-M, r should be equal for all shares. If it is not so, the low return yielding return shares will be sold by the investors who will purchase the high- return yielding shares. This process will tend to reduce the price of the low-return shares and increase the prices of the high-return shares. This switching or arbitrage will continue until the differentials in rates of return are eliminated. The discount rate will also be equal for all firms under M-M assumptions since there are no risk differences.

Drawbacks :

There are some critics who argue that the assumptions made by MM dividends are irrelevant. According to them dividends matter because of the uncertainty characterising the future, the imperfections in the capital market, and the existence of taxes. We will discuss the implications of these as follows:

1. Information About Prospects :In a world of uncertainty the dividends paid by the company, based as they are on the judgment of the management about future, convey information about the prospects of the company. A higher dividend payout ratio may suggest that the future of the company, as judged by management, is promising. A lower dividend payout ratio may suggest that the future of the company as considered by management is uncertain. Gordon has eloquently expressed this view. An allied argument is that dividends reduce uncertainty perceived by investors. Hence investors prefer dividends to capital gains. So shares with higher current dividends, other things being equal, command a high in the market.

2. Uncertainty and Fluctuations: Due to uncertainty, share prices tend to fluctuate, sometimes rather widely. When share prices fluctuate, conditions for conversion of current income into capital value and vice versa may not be regarded as satisfactory by investors. Some investors who wish to enjoy more current income may be reluctant to sell a portion of their shareholding in a fluctuating market. Such investors would naturally prefer, and value more, a higher payout ratio. Some investors who wish to get less current income may be hesitant to buy shares in a fluctuating market. Such investors would prefer, and value a lower payout ratio.

3. Offering of Additional Equity at Lower Prices: MM assume that a firm can sell additional equity at the current market price. In practice, firms following the advice and suggestions of merchant bankers offer additional equity at a price lower than the current market price. This practice of 'underpricing' mostly due to market compulsions, ceteris paribus, makes a rupee of retained earnings more valuable than a rupee of dividends. This is because of the following chain of causation:

4. Issue cost: The MM irrelevance proposition is based on the premise that a rupee of dividends be replaced by a rupee of external financing. This is passib1e when there is no issue cost. In the real world where issue cost is incurred, the amount of external financing has to be greater than the amount of

dividend paid. Due to this, other things being equal, it advantageous to retain earnings rather than pays dividends and resort to external finance.

5. Transaction Costs: In the absence of transaction costs, current income (dividends) and Capital gains are alike-a rupee of capital value can be converted into a rupee of current income and vice versa. In such a situation if a shareholder desires current income (from shares) greater than the dividends received, he can sell a portion of his capital equal in value to the additional current income sought. Likewise, if he wishes to enjoy current income less than the dividends paid, he can buy additional shares equal in value to the difference between dividends received and the current income desired. In the real world, however, transaction costs are incurred. Due to this, capital value cannot be converted into an equal current income and vice versa. For example, a share worth Rs 100 may fetch a net amount of Rs 99 after transaction costs and Rs 101 may be required to. buy a share worth Rs 100. Due to. transaction costs, shareholders who have preference Higher dividend payout Greater dilution of the value of equity Greater volume of under priced equity issue to financea given level of investment far current income, would prefer a higher payout ratio and shareholders who have preference for deferred income would prefer a lower payout ratio.

6. Differential Rates of Taxes: MM have assumed that the investors are indifferent between a rupee of dividends and a rupee of capital appreciation, This assumption is true when the taxation is the same for current income and capital gains. In the real world, the effective tax on capital gains is lower than that for current income. Due to this difference, investors would prefer capital gains to current income.

COMPANY ANALYSIS
SHAREHOLDING PATTERN

Major Shareholders LG Corp. National Pension Service

Stake 34.80% 5.04%

REVENUE

Periods March June September December

2010 1.32173E7 1.44097E7 1.34291E7 1.46977E7

2011 1.31599E7 1.43851E7 1.28972E7 1.38143E7

2012 1.22279E7 1.2859E7

Note: Units in Millions of Won

EARNINGS PER SHARE

Periods March June September December

2010 3836.53 163.635 -37.4856 -1564.39

2011 -183.395 592.128 -2574.99 -716.03

2012 1308.03 867.718

Note: Units in Won

CONSENSUS ESTIMATES ANALYSIS

# of Estimates

Mean

High

Low 1 Year Ago

SALES (in millions) Quarter Ending Sep12 Quarter Ending Dec12 Year Ending Dec12 Year Ending Dec13 EARNINGS (per share) Quarter Ending Sep12 Quarter Ending Dec12 Year Ending Dec12 Year Ending Dec12 1,351.85 2,838.98 784.52 1,912.88 36 13,082.50 14,858.00 12,203.00 15,096.90

36 14,044.10 16,724.00 12,825.00

16,309.90

46 52,307.40 56,825.00 50,115.00

61,630.60

46 54,813.70 66,623.00 50,088.50

64,151.20

12

1,437.34

2,842.89

656.00

2,002.67

47

4,868.67

7,132.00

1,836.00

8,445.13

47

7,416.14 11,545.00

4,188.90

9,452.14

13 LT Growth Rate (%) 3 2.73 18.08 -16.90 13.86

Sales and Earnings Figures in U.S. Dollars (USD)

VALUATION RATIOS

Company P/E Ratio (TTM) P/E High - Last 5 Yrs. P/E Low - Last 5 Yrs. -68.77 8.88

Industry 10.52 18.13 9.06

Sector 74.74 30.08 9.33

Beta

0.99

0.69

0.82

Price to Sales (TTM) Price to Book (MRQ) Price to Tangible Book (MRQ) Price to Cash Flow (TTM)

0.22 0.86 0.96

1.08 1.54 1.95

1.41 1.43 1.75

11.90

7.57

10.69

Price to Free Cash Flow (TTM)

--

106.43

212.77

% Owned Institutions

--

--

--

DIVIDENDS Year on year, growth in dividends per share increased 2.32% while earnings per share excluding extraordinary items fell by 271.76%. The positive trend in dividend payments is noteworthy since very few companies in the audio & video equipment industry pay a dividend. Additionally, five year annualized dividend per share growth ranks below the industry average relative to its peers.

Company Dividend Yield Dividend Yield - 5 Year Avg. Dividend 5 Year Growth Rate 0.29 0.68 -22.88

Industry 0.44 0.95 -2.30

Sector 0.81 1.11 3.17

Payout Ratio(TTM)

--

4.37

9.41

Dividend Yield

Dividend Yield

Sector

Industry

Company

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Dividend 5 Year Growth Rate

Dividend 5 Year Growth Rate

Sector

Industry

Company

-25

-20

-15

-10

-5

Dividend Date Actual 2010 2009 2008 2007 2006 2005 2004 % 2.54 1.48 0.70 1.00 1.25 2.27 1.68 1.56

P/E

EPS Amount

1.00 1746.40 850.50 748.00 1.25 1248.50 1500.24 999.96

6.8 8.30 31.0 7.9 38.6 11.0 6.9 9.6

10.00 14216.87 3919.35 9468.35 2.59 5000.00 12942.03 6677.08

DIVIDEND DECLARED
Announcement Date 28-04-12 29-04-11 29-04-10 Effective Date 28-06-12 02-06-11 04-06-10 Dividend Type Final Final Final Dividend (%) 110.00 100.00 65.00 Remarks

(Regular Dividend of Re.0.25 per share and Special Div. of Re. 0.35 per share) AGM

25-05-09

29-06-09

Final

60.00

02-06-08

06-08-08

Final

35.00

15-06-07

06-09-07

Final

50.00

GROWTH RATES

Company Sales (MRQ) vs Qtr. 1 Yr. Ago Sales (TTM) vs TTM 1 Yr. Ago Sales - 5 Yr. Growth Rate -10.61

Industry 17.27

Sector 16.87

-6.96

11.99

12.16

3.20

12.59

8.61

EPS (MRQ) vs Qtr. 1 Yr. Ago EPS (TTM) vs TTM 1 Yr. Ago EPS - 5 Yr. Growth Rate

46.54 6.53

45.54 --

1,004.79 --

--

9.99

19.38

Capital Spending - 5 Yr. Growth Rate

-14.56

10.73

3.83

FINANCIAL STRENGTH

Company Quick Ratio (MRQ) Current Ratio (MRQ) LT Debt to Equity (MRQ) Total Debt to Equity (MRQ) Interest Coverage (TTM) 0.79 1.14 30.33 52.22 -2.96

Industry 1.17 1.59 8.62 18.37 0.20

Sector 1.20 1.52 34.47 57.85 6.18

PROFITABILITY RATIOS

Company Gross Margin (TTM) Gross Margin - 5 Yr. Avg. 23.41 23.49

Industry 32.96 29.66

Sector 28.73 26.95

EBITD Margin (TTM) EBITD - 5 Yr. Avg

3.62 7.77

-15.76

-13.27

Operating Margin (TTM)

1.52

10.92

9.05

Operating Margin - 5 Yr. Avg.

3.65

8.16

7.42

Pre-Tax Margin (TTM) Pre-Tax Margin - 5 Yr. Avg.

0.19 2.44

11.01 8.75

10.10 7.82

Net Profit Margin (TTM) Net Profit Margin - 5 Yr. Avg.

-0.24 1.94

8.47 7.17

7.44 6.02

Effective Tax Rate (TTM) Effective Tax Rate - 5 Yr. Avg.

226.10 20.48

41.07 19.48

32.63 25.70

EFFICIENCY

Company Revenue/Employee (TTM) Net Income/Employee (TTM)

Industry

Sector

1,467,960,960 1,716,384,734 1,258,883,748

-3,513,547

153,230,478

120,955,926

Receivable Turnover (TTM) Inventory Turnover (TTM) Asset Turnover (TTM)

7.10

8.12

11.97

7.31

6.94

8.37

1.57

1.22

0.95

MANAGEMENT EFFECTIVENESS

Company Return on Assets (TTM) Return on Assets - 5 Yr. Avg. -0.38 3.15

Industry 10.15 8.68

Sector 7.97 6.46

Return on Investment (TTM) Return on Investment - 5 Yr. Avg.

-0.70 7.12

14.19 13.34

11.50 10.39

Return on Equity (TTM) Return on Equity - 5 Yr. Avg.

-1.03 6.66

12.72 12.33

13.43 12.29

RESEARCH METHODOLOGY
NEED FOR STUDY Many dividend factors influence in

payment First

decision the

corporations.

legislative

framework could determine whether companies pay or do not pay

dividends. The common law for instance prohibits the payment of dividends out of capital amounts even where the entitys memorandum of association and articles of association allows. Further legal provisions such as those of Section 263 of the UKs Companies Act 1985 prohibit

dividends payment from distributable profits when such perturbs the equilibrium between the net worth and capital amounts of the firm.

Having a clear delineation of the procedure of dividend proposal could thus help establish various controls in the company. Through a dividend policy that encompasses profitability, liquidity and other determinants; companies can avoid payment of excessive amounts as dividends and prevent excess liquidity that motivates imprudent managerial practices. Whether dividend policy proves effective in generating desired feedback may however be subject to investor behaviour rationality or irrationality thereof.

Among the factors identified to provide such motivations in the study were changes to the earnings level. Accordingly, managers were compelled to either distribute a portion of any substantial earnings increase to shareholders or cut back dividends in case of substantial or progressive earnings decline. Thus, profitability of the company is contended as a

significant determinant of dividends amounts. Though playing a subtle role than profitability; liquidity, debts due, growth opportunities, taxation and restrictive provisions could also factor into the dividend policy.

RESEARCH PROBLEM:

Efficient Market Hypothesis states that it is impossible to beat the market because the stock market efficiency causes the stock prices to incorporate and reflect all the new information in the stock prices. We want to study whether the markets are efficient when the dividend policy is announced by the corporate. There are certain issues which are to be focused upon. They are: To find out any relation between corporate dividend policy and market value of accompany. To analyze the effect of corporate dividend decisions in terms of creating abnormality in the price and volume of the company. To check whether the markets are efficient when any news about dividend decisions of accompany is received.

RESEARCH OBJECTIVES To explore the insight f a corporate event named Dividend Policy which drags lot of attention and results into may drastic changes in the market valuation of he firm. To study the impact of dividend on the price and volume before and after such dividend is announced. To check whether abnormality exists in the price and volume of the share as the dividend is announced. To find out the room for leakage of any insider information about dividend policy of accompany To check whether any insider information plays any part in abnormal trading effect and abnormal price effect in a script. To analyze the bearing of such abnormality (if it does exist) on the market capitalization and volumes traded on the stock market a month before the

Announcement Date and a month after the ex-dividend date for all the scripts under the study. To measure the cumulative impact of corporate dividend policy and try to conceive a general trend based on it.

SCOPE OF THE RESEARCH

RESEARCH DESIGN

Research design is the plan, structure to answer whom, when, where and how the subject is under investigation. Here plan is an outline of the research scheme & which the researcher has to work. The structure of the research is a more specific outline and the strategy out, specifying the methods to be used in the connection & analysis of the data.

Descriptive Research Design

The type of research design used in this study is the descriptive research. The main characteristics of this method is that the researcher has no control over the variables and he can only report what has happened or what is happening. This study which comprises the dividend policy of LG group from the opinion of the general investor as well as insight personal of the organisation. Hence, this research study is categorized as Descriptive Research Method. DATA COLLECTION

The main source of information for this study is based on the data collection. Data collected are both primary and secondary in nature.

 Primary Data Primary data have been directly collected from the general investors and employees of LG Group by survey method through undisguised structured questionnaire. Questions like open ended, close ended, multiple choice, Dichotomous question have been used for the purpose of data collection.

Secondary Data Secondary data have been collected from official website of LG and also from other supportive official websites related to project topic.

Types of questions

Open ended question Open ended question are the type of question used to get suggestion from the respondent in order to give feed back to the organization.

Close ended question Close ended question are the type of questions with a clear declined set of alternatives that confine the respondents to choose one of them.

Multiple choice question It consists of multiple choices in which the respondents can choose more than one

Dichotomous question It consists of two choices of answers in which the respondent has to choose one of them.

POPULATION

SAMPLING Convenience sampling is been used in the study. This type of sampling is basically used when you simply stop anybody in the street who is prepared to stop. In other words, the sample comprises subjects who are simply available in a convenient way to the researcher. There is no randomness and the likelihood of bias is high. You can't draw any meaningful conclusions from the results you obtain. However, this method is often the only feasible one, particularly for students or others with restricted time and resources, and can legitimately be used provided its limitations are clearly understood and stated. Sample size Sampling Technique : Convenience Judgmental sampling Sampling Unit : One company of BSE-500 Sampling Size :

Methods / tools of analysis

Tools used for analysis MS Excel software SPSS software

Methods used for analysis Average Graph Percentage

LIMITATIONS OF THE STUDY

There were certain limitations in undertaking this research work. As it is understood that the limitations are a part of the project, they have been overshadowed by the benefits of the study.

DATA ANALYSIS

Question : position within the security market

Table 1 : position within the security market No of response percentage 70 93.3333 Investor 5 6.6777 manager 0 0 Both investor and manager 75 100 Total

No of response
0% 7%

Investor manager 93% Both investor and manager

Conclusion : 93 % that is 70 people from the respondent hold the position of general investor where as only 7 % that is 5 people only hold the managerial position which reflects that the most survey population is playes a role of investor in the stock market and taken samples also reflects the same picture.

Question : companys dividend decision is as important as the companys investment and financing decisions in determining firm value.

Table 2 : dividend decision in determining firm value. No of response percentage 21 28 Disagree 2 2.666667 Strongly disagree 46 61.33333 Agree 6 8 Strongly agree 75 100 Total

dividend decision in determining firm value.

120 100 80 60 40 20 0 percentage No of response Disagree 28 21 Strongly disagree 2.666667 2 Agree 61.33333 46 Strongly agree 8 6

Conclusion : The survey undertaken by the researcher shows that 46 respondent which is 61 % of samples are agreed that dividend has direct reflection on the valuation of the firm and more 6 people which is 8 % are strongly agreed for the which means that the firms dividend decision has the great influence on the value of the firm because dividend is the most commen and easiest way to attract investor.

Question : company declare dividend payouts from surplus earnings only after they are satisfied desired investments have been financed.

Table : dividend payouts from surplus earnings only No of response percentage 16 21.33333 Disagree 1 1.333333 Strongly disagree 55 73.33333 Agree 3 4 Strongly agree 75 100 Total

Table : dividend payouts from surplus earnings only No of response Table : dividend payouts from surplus earnings only percentage

100

73.33333 55

75

21.33333 16 1.333333 1 Strongly disagree 4 3 Agree Strongly agree Total

Disagree

Conclusion : Approx 77 % of the population which is 58 respondents are believe in firm pays dividend only from surpluses earning of the firm. Whereas 23 % which is 17respondents believe in firm is ready to pay dividend from the regular profit also. Dividend payment is depends on the firms dividend policy and subject to change with the internal and external environments.

Question : shareholders as preferring the bird-in-the-hand theory of dividend payouts,

that is, receiving dividend payouts sooner rather than later because of the uncertainty of future dividends.

Table : shareholders as preferring the bird-in-the-hand theory No of response percentage 16 21.33333 Disagree 4 5.333333 Strongly disagree 35 46.66667 Agree 20 26.66667 Strongly agree 75 100 Total

50 40 30 20 10 0 Disagree Strongly disagree percentage No of response Agree Strongly agree

No of response percentage

Disagree 16 21.33333

Strongly disagree 4 5.333333

Agree 35 46.66667

Strongly agree 20 26.66667

Conclusion : Bird in hand theory reflects the share holders typical behaviour of rather than getting reliable on more higher price in future the prefare to take what they get today as dividend. The survey shows common human behaviour of 35 respondent ( 47 % ) agree, 20 strongly agree ( 27 % ) for the taking benefits from the firm in present rather then hoping future advantages.

Question : companys dividend policy is independent of its share price

Table : companys dividend policy is independent of its share price No of response percentage 36 48 Disagree 7 9.333333 Strongly disagree 26 34.66667 Agree 6 8 Strongly agree 75 100 Total

8%

Disagree 35% 48% Strongly disagree Agree Strongly agree

9%

Conclusion : 48 % that is 36 respondents are disagreed and 9 % that is 7 respondents are strongly disagreed for the share price of the company depends on the dividend policy adopted by the firm. Which shows that share price of the firm is independent from any dividend policy adopted by the firm and depends on the external market factor within which the firm gets operate.

Question : dividend payout and share prices

Table : dividend payout and share prices Decrease dividend Dividend payout is usually payouts when share prices accompanied by an increase are undervalued in the share price. No of response 21 15 30 9 75 percentage 28 20 40 12 100 No of response 12 20 17 26 75 percentage 16 26.66667 22.66667 34.66667 100

Disagree Strongly disagree Agree Strongly agree Total

Conclusion :

Decrease dividend payouts when share prices are undervalued

50

0 Disagree Strongly disagree Agree Strongly agree No of response percentage Disagree 21 28 Strongly disagree 15 20 Agree 30 40 Strongly agree 9 12

Dividend payout is usually accompanied by an increase in the share price.

40 Axis Title 30 20 10 0 Disagree Strongly disagree Agree Strongly agree percentage No of response

No of response percentage

Disagree 12 16

Strongly disagree 20 26.66667

Agree 17 22.66667

Strongly agree 26 34.66667

Question : maintain steady or modestly growing dividends in applying its dividend

policy.

Table : steady or modestly growing dividends in applying its dividend policy. No of response percentage 15 20 Disagree 4 5.333333 Strongly disagree 33 44 Agree 23 30.66667 Strongly agree 75 100 Total

Strongly agree

Agree

Strongly disagree

Disagree

0 No of response percentage

10 Disagree 15 20

20

30

40

50 Agree 33 44

60

70

80

Strongly disagree 4 5.333333

Strongly agree 23 30.66667

Conclusion :

Question : dividend announcements as causing only temporary share price adjustments and therefore the effect on firm value is negligible.

Table : dividend announcements effect on firm value No of response percentage 14 14.66667 Disagree 10 8 Strongly disagree 28 37.33333 Agree 40 40 Strongly agree 75 100 Total

80 70 60 50 40 30 20 10 0 percentage No of response Disagree 14.66667 14 Strongly disagree 8 10 Agree 37.33333 28 Strongly agree 40 40

Question : A formal dividend policy gives shareholders the assurance that dividend

payouts will be treated in a predictable instead of an inconsistent manner.

Disagree Strongly disagree Agree Strongly agree Total

Table : A formal dividend policy No of response percentage 20 26.66667 5 6.666667 27 36 23 30.66667 75 100

31%

27%

Disagree Strongly disagree Agree 6% Strongly agree

36%

Question : Is the dividend decision, in your opinion, as important as the financing and

investment decisions in determining firm value.

Table : dividend decision in determining firm value. No of response percentage 7 9.333333 Disagree 1 1.333333 Strongly disagree 42 56 Agree 25 33.33333 Strongly agree 75 100 Total

100 90 80 70 60 50 40 30 20 10 0 percentage No of response Disagree 9.333333 7 Strongly disagree 1.333333 1 Agree 56 42 Strongly agree 33.33333 25

Conclusion : 42 respondents that is 56 % agreed and 25 respondents which is 34 % strongly agreed for dividend decision of the firm can change the overall value of the firm. Investors mostly prefer to invest in the firm which has stable dividend policy and firm pays dividend on regular basis because investors are more likely to prefer to gets benefit in present over past.

FINDINGS
The Corporate Focus is to fulfil strategic objectives with emphasis on lowest possible cost. The company believes that the investors like bird-in-the-hand theory but after a certain payout it follows contrary-MM dividend irrelevance theory. Although the company paid cash dividend over last seven years, it paid stock dividend along with cash dividend in the last four years. Stock dividends are used to keep the stock price more or less constrained. the analysis shows that dividend was stable over time. The firm uses the residual dividend model to set the long run target payout ratio at a level that will permit the firm to meet its equity requirements with retained earnings. Most dividends go to few rich people of our society which is upward bias of the firm. If possible the bias should be curbed.

CONCLUSION
This study examines the dividend behaviour of Indian corporate firms over the period 2000 2011 and attempts to explain the observed behaviour. Trends indicate that the firm paying dividend during the study period has shown an uptrend till 2005 and has fallen subsequently. Average DPS on the other hand has shown a steady growth except for year 2003. Average percentage PR showed a more stable pattern up to 2007 and then has shown a declining trend. Analysis also shows that a firm has consistently paid same levels of dividend. Of the payers, regular payers have consistently paid higher payout as well as higher average dividend compared to that of current payers. Initiators have always paid higher levels of dividend yield compared to that of other payers.

Analysis of influence of tax regime changes shows that the trade-off theory does not hold true in the Indian context, as Indian corporate firms on average do not appear to have increased dividend payments despite atilt in tax regime in favour of more dividend

dividends.Analysis of characteristics of payers and non-payers shows that paying companies are more profitable and large in size.

However, growth doesnt seem to deter Indian firms from paying higher dividends. Further, firms appear to prefer the pecking order of funds in building their larger asset base. An analysis of shows that average earnings of dividend omitting firm has shown significant difference over the past 3 and next 3 years, whereas initiating firms have exhibited a contrasting trend. An analysis of other non-extreme dividend events such as dividend reductions and non-reductions shows that current losses are an important determinant of dividend reductions for firms with established track record. Further analysis also shows that dividend changes are impacted more by contemporaneous and lagged earnings performance rather than by future earnings performance. The present study has considered only cash dividends and not

sharerepurchases. Share repurchases or buyback has been permitted in theIndian context only recently and this may well have influenced thedividend behavior of Indian companies, as so me firms would havesubstituted share repurchases for cash dividends. Similarly, in the present study only final cash dividends are considered and the stock dividends by firms are not considered which may limit generalizations of the findings. Further, the present study has

not considered the stock market reactions to dividend events and has not examined at great depth the interrelations between dividend and other corporate finance decisions.

RECOMMENDATIONS

The dividend news in the market creates abnormality in the return and volume of the script, so that investor should not treat that markets are always efficient. Investors should behave rationally while taking their decision regarding investment in any script. They should wait for the abnormality in the script to be removed before investing in it.

For long term investor, dividend decision of a company should not be a major influencing factor in their investment decision. Investors should consider the fundamentals of the company before investing in it and should consider the actual performance of the company over the period of time. Dividend as a corporate event affects the share prices of the firm for a specific time period only. As dividend event gets over the abnormality in the script is removed and the stock prices start reflecting its actual value. So investors should not

get lured by the dividends. Directors should adopt a dividend policy which gives consideration to the interests of each of the group comprising a substantial proportion of shareholders. A definite dividend policy, followed for a long period in the past trends to create clientele effect. That is it attracts those investors that consider the dividend policy in accord with their investment requirements. If the company suddenly changes its dividend policy, it may work to the detriment to those shareholders as they may have to switch to other companies to fulfil their needs. Thus an established dividend policy should be changed only after having an analyzed its probable effect on existing shareholders. It should be changed slowly and not abruptly. A huge positive abnormal return before the announce date of dividend indicates the sins of leakage of any insider information. So the investor must check room for such insider information before investing in that company. This will help them to protect themselves from future losses.

Future scope:

Future studies may examine the market reaction to dividend announcements, other possible determinants of dividend behaviour such and

asflotation costs, and the relationships between dividend decision andfinancing investment decisions.

BIBLIOGRAPHY

ANNEXTURE

1) Which of the following choices best describe your position within the security market? A. Investor B. Manager C. Both investor and manager 2) Management in the company subscribe to the belief that a dividend policy is important because of the effect it has on the companys share price and therefore its value.

A. Disagree B. Strongly disagree C. Agree D. Strongly agree 3) Management in company subscribe to the belief that the companys dividend decision is as important as the companys investment and financing decisions in determining firm value.

A. Disagree B. Strongly disagree C. Agree D. Strongly agree 4) Company applies an optimal dividend policy that strives to strike a balance between current dividends and future growth to maximise share price.

A. Disagree B. Strongly disagree C. Agree

D. Strongly agree 5) Management in company subscribe to the belief that a common dividend policy could be used by all companies because no dividend policy is superior to any other dividend policy in determining firm value.

A. Disagree B. Strongly disagree C. Agree D. Strongly agree

6) Management of company declare dividend payouts from surplus earnings only after they are satisfied desired investments have been financed.

A. Disagree B. Strongly disagree C. Agree D. Strongly agree

7) Management views shareholders as preferring the bird-in-the-hand theory of dividend payouts, that is, receiving dividend payouts sooner rather than later because of the uncertainty of future dividends.

A. Disagree B. Strongly disagree C. Agree D. Strongly agree 8) Dividend payouts, generally, affect a firms cash flows causing the firm to seek financing from capital markets resulting in an increase in the firms cost of capital.

A. Disagree B. Strongly disagree C. Agree D. Strongly agree 9) Management changes the dividend payout when share prices are undervalued, to signal favourable prospects to investors.

A. Disagree B. Strongly disagree C. Agree D. Strongly agree 10) Management in company s u b s c r i b e t o t h e belief that a companys dividend policy is independent of its share price in determining firm value.

A. Disagree B. Strongly disagree C. Agree D. Strongly agree 11) An increase in a dividend payout is usually accompanied by an increase in the share price

A. Disagree B. Strongly disagree C. Agree D. Strongly agree 12) A decrease or omission of a dividend payout is usually accompanied by a decrease in the share price.

A. Disagree B. Strongly disagree C. Agree D. Strongly agree 13) Company applies a dividend policy that avoids changing its regular dividend payout if that change might have to be reversed the following year.

A. Disagree B. Strongly disagree C. Agree D. Strongly agree 14) Management of company are of the opinion that shareholders are indifferent to receiving a dividend as opposed to an increase in the value of their shares.

A. Disagree B. Strongly disagree C. Agree D. Strongly agree 15) Dividend payouts remove excess cash flows from being invested in negative NPV projects that negatively impact firm value.

A. Disagree B. Strongly disagree C. Agree D. Strongly agree

16) Dividends payouts necessitate a firm to seek more external financing, which subjects

the firm to scrutiny from financial analysts to assess whether management act in the best interest of shareholders in building firm value.

A. Disagree B. Strongly disagree C. Agree D. Strongly agree

17) Company strives to maintain steady or modestly growing dividends in applying its dividend policy.

A. Disagree B. Strongly disagree C. Agree D. Strongly agree

18) Management in company subscribe to the belief that dividend policies have no effect on the intrinsic value of shares.

A. Disagree B. Strongly disagree C. Agree D. Strongly agree

19) Dividend payouts should not depend on the financing or investment decisions of the firm but rather to satisfy shareholders preference for dividends.

A. Disagree B. Strongly disagree C. Agree D. Strongly agree

20) Dividend payouts as a signalling mechanism about future believable to investors than other media forms.

prospects are more

A. Disagree B. Strongly disagree C. Agree D. Strongly agree

21) In applying its dividend policy company regularly towards a predetermined target payout ratio

adjust

its

dividend

payout

A. Disagree B. Strongly disagree C. Agree D. Strongly agree

22) Management in company view dividend announcements as causing only temporary share price adjustments and therefore the effect on firm value is negligible.

A. Disagree B. Strongly disagree C. Agree D. Strongly agree

23) A formal dividend policy gives shareholders the assurance that dividend payouts will be treated in a predictable instead of an inconsistent manner.

A. Disagree B. Strongly disagree

C. Agree D. Strongly agree

24) Is the dividend decision, in your opinion, as important as the financing and investment decisions in determining firm value?.

A. Disagree B. Strongly disagree C. Agree D. Strongly agree

Balance Sheet of LG Balakrishnan and Brothers

------------------- in Rs. Cr. ------------------Mar '12 12 mths Mar '11 Mar '10 Mar '09 Mar '08

12 mths

12 mths

12 mths

12 mths

Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities

7.85 7.85 0.00 0.00 221.35 1.39 230.59 95.86 17.37 113.23 343.82 Mar '12 12 mths

7.85 7.85 0.00 0.00 187.57 1.39 196.81 107.17 9.43 116.60 313.41 Mar '11

7.85 7.85 0.00 0.00 150.88 1.39 160.12 101.75 5.17 106.92 267.04 Mar '10

7.85 7.85 0.00 0.00 132.40 1.39 141.64 149.83 1.71 151.54 293.18 Mar '09

7.85 7.85 0.00 0.00 135.20 1.79 144.84 230.04 6.61 236.65 381.49 Mar '08

12 mths

12 mths

12 mths

12 mths

Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions

360.44 169.63 190.81 4.99 16.51 191.33 104.98 4.47 300.78 32.79 0.75 334.32 0.00 189.84 12.96

346.58 159.43 187.15 4.43 16.51 152.91 82.18 3.36 238.45 49.52 1.46 289.43 0.00 152.72 31.39

293.55 145.99 147.56 3.29 12.25 122.24 78.31 3.26 203.81 50.38 1.37 255.56 0.00 125.51 26.11

280.24 126.43 153.81 3.95 9.67 108.87 75.79 4.21 188.87 58.22 33.43 280.52 0.00 127.55 27.21

386.97 158.42 228.55 12.67 2.76 131.93 105.42 4.34 241.69 44.59 0.95 287.23 0.00 132.30 17.41

Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs)

202.80 131.52 0.00 343.83 99.51 292.05

184.11 105.32 0.00 313.41 97.76 249.00

151.62 103.94 0.00 267.04 111.98 202.26

154.76 125.76 0.00 293.19 18.97 17.87

149.71 137.52 0.00 381.50 19.73 18.23

LG Balakrishnan and Brothers Key Ratios ------------------- in Rs. Cr. ------------------Mar '11 Investment Valuation Ratios Face Value Dividend Per Share Operating Profit Per Share (Rs) Net Operating Profit Per Share (Rs) Free Reserves Per Share (Rs) Bonus in Equity Capital Profitability Ratios Operating Profit Margin(%) Profit Before Interest And Tax Margin(%) Gross Profit Margin(%) Cash Profit Margin(%) Adjusted Cash Margin(%) Net Profit Margin(%) Adjusted Net Profit Margin(%) Return On Capital Employed(%) Return On Net Worth(%) Adjusted Return on Net Worth(%) Return on Assets Excluding Revaluations Return on Assets Including Revaluations Return on Long Term Funds(%) Liquidity And Solvency Ratios Current Ratio Quick Ratio Debt Equity Ratio Long Term Debt Equity Ratio Mar '10

10.00 -115.84 910.73 239.10 76.63 12.71 9.08 9.11 10.86 10.86 6.45 6.45 21.47 23.67 26.66 249.10 250.87 22.64 1.38 0.70 0.60 0.52

10.00 -99.47 705.86 188.65 76.63 14.09 10.05 10.13 8.84 8.84 4.37 4.37 22.61 15.64 17.59 198.65 200.42 22.81 1.72 0.84 0.68 0.67

Debt Coverage Ratios Interest Cover Total Debt to Owners Fund Financial Charges Coverage Ratio Financial Charges Coverage Ratio Post Tax Management Efficiency Ratios Inventory Turnover Ratio Debtors Turnover Ratio Investments Turnover Ratio Fixed Assets Turnover Ratio Total Assets Turnover Ratio Asset Turnover Ratio Average Raw Material Holding Average Finished Goods Held Number of Days In Working Capital Profit & Loss Account Ratios Material Cost Composition Imported Composition of Raw Materials Consumed Selling Distribution Cost Composition Expenses as Composition of Total Sales Cash Flow Indicator Ratios Dividend Payout Ratio Net Profit Dividend Payout Ratio Cash Profit Earning Retention Ratio Cash Earning Retention Ratio AdjustedCash Flow Times

4.38 0.60 6.02 5.66

2.90 0.68 3.85 3.18

5.61 8.77 5.61 2.03 2.15 2.03 49.64 24.02 53.24 61.20 -5.44 -19.70 12.65 82.51 88.30 1.52

5.37 -5.37 1.88 2.10 1.88 59.93 27.48 66.37 55.98 -5.69 -24.39 12.83 78.32 87.96 2.18

Dividends Declared Announcement Effective Dividend Dividend Date Date Type (%) Final 110% 28/04/2012 28/06/2012 29/04/2011 02/06/2011 29/04/2010 04/06/2010 25/05/2009 29/06/2009 Final Final Final 100% 65% 60%

Remarks

02/06/2008 06/08/2008 15/06/2007 06/09/2007 01/06/2006 11/08/2006 23/05/2005 04/08/2005 08/03/2005 23/03/2005

Final Final Final Final Interim

(Regular Dividend of Re.0.25 per share and Special Div. of Re. 0.35 per share) 35% AGM 50% 30% 30% 50% (In recognition of Golden Jubilee Year of the Company) 30% AGM 55% 40% 35% 22.5% AGM

26/05/2004 08/07/2004 23/05/2003 13/08/2003 23/05/2002 26/05/2001 23/07/1999

Final Final Final Final Final

21/09/1998 07/07/1997

Final Final

22.5% 22.5%