The Great Eastern shipping company has not declared dividend

for last 15 years

DIVIDEND POLICY

Jitendra Singh
Aravali Institute of
Management
1 Aravali Institute of Management September 22, 2009
 Dividend policy involves decision to pay out
earnings or to retain them for re-investment

Dividend
Policy
Is it
important??
????
2 Aravali Institute of Management September 22, 2009
 Relevant Terms

Dividend
Dividend Payout
Ratio
Retention Ratio
Bonus Share
Splitting of Share
Capital Gain- Short
Term
Long
3
Term
Aravali Institute of Management September 22, 2009
 FACTORS

Status of the company & available

opportunities
Stability of Dividends
Legal, Contractual and Internal Constraints
Owner’s Consideration
Capital Market Consideration
Inflation
Optimum
Utilization of
Earning
4 Aravali Institute of Management September 22, 2009
 Status of the company & available
opportunities

Growth company v/s Mature Company

Available Projects or opportunities

Wealth Maximisation
Sufficient funds to
finance growth

5 Aravali Institute of Management September 22, 2009

 Stability of Dividend

Constant Dividend Per Share- Dividend

Equalization Reserve
Constant payout Ratio
Stable dividend plus extra Dividend

Why stable
dividend???????????
???
Desire for current Income
Informational Content
6 Aravali Institute of Management
Institutional Investors September 22, 2009
 Legal & Contractual
Constraints
Insolvency?
????
Capital Impairment rules By Liabilities >
Assets
Net Profits By default in
Insolvency Payment

Contractual Requirements

Dividend percentage
Restriction
Fixed Dividend
Restriction
7 Fixed Retention
Aravali Institute of Management September 22, 2009
Restriction
 Internal Constraint

Liquid Assets
Financial Requirement
Availability of Funds
Earning Stability
Control

UNUSED
DEBT
CAPACITY
8 Aravali Institute of Management September 22, 2009
 Owners Consideration

The Tax Status of the shareholder

Opportunity Cost
Dilution of Ownership

9 Aravali Institute of Management September 22, 2009

 Other factors

 Easy Access
 Institutional Buyers
 Inflation

10 Aravali Institute of Management September 22, 2009

 Forms of Dividend

 Cash Dividend
 Bonus Shares
 Shares Split
 Buyback of Shares

11 Aravali Institute of Management September 22, 2009

 Bonus Share

It Involves payment to existing owners of

dividend in the form of share

Stock Splits

It is a method commonly used to lower the

market price of shares by increasing the number
of shares belonging to each shareholder

12 Aravali Institute of Management September 22, 2009

 Forms of Dividend

BONUS SHARE
Equity Share before bonus issue
Equity share ( 30000 Share of Rs 100
each)- Rs 30,00,000
Share premium- ( Rs 25 per share)
- Rs 7,50,000
Retained earnings
- Rs 62,50,000
Equity portion after bonus issue(1:2)
Equity share ( 45000 Share of Rs 100 each)-
13 Aravali Institute of Management September 22, 2009
Rs 45,00,000
 Forms of Dividend
SPLIT SHARE
Equity Share before bonus issue
Equity share ( 30000 Share of Rs 100
each)- Rs 30,00,000
Share premium- ( Rs 25 per share)
- Rs 7,50,000
Retained earnings
- Rs 62,50,000
Equity portion after split issue(10:1)
Equity share ( 300000 Share of Rs 10 each)-
14
Rs 30,00,000
Aravali Institute of Management September 22, 2009
Share premium- (Rs 2.5 per share)
 Bonus Share

Bonus share is the distribution of shares free

of cost to the existing shareholder

Illusion or real Dividend

15 Aravali Institute of Management September 22, 2009

 Benefit of Bonus share to
Shareholder

 Tax Benefit
 Indication to higher future profit
 Future dividend may increase
 Psychological Value

16 Aravali Institute of Management September 22, 2009

 Benefit to Company

 Conservation of Cash
 Only mean to pay dividend under liquidity
crunch
 More attractive share price

17 Aravali Institute of Management September 22, 2009

 Limitation of Bonus Share

 Shareholder’s wealth remains unaffected

 Costly to administer

18 Aravali Institute of Management September 22, 2009

 Legal Restriction on Bonus share

 Residual reserve criteria- 40% of the

increased paid up capital
 Profitability criteria- 30% of the average
PBT for the last three years should be
at least equal to 10% of the increased paid
up capital
 All partly share be made fully paid
 The company should not default in
repayment of fixed deposits, interest or
principal or debenture
19 Aravali Institute of Management September 22, 2009
 Revaluation reserve cannot be used
 Legal Restriction on Bonus share

Suppose
Paid up Capital- 80 Crore
Reserves- 100 Crore
Net worth- 180 Crore
Average PBT for last three years- 50 Crore
Find the Bonus ratio

20 Aravali Institute of Management September 22, 2009

 Advantages of share split

 Make share attractive

 Higher profit in future
 Higher dividend to shareholders

21 Aravali Institute of Management September 22, 2009

 Jitendra Singh
Aravali Institute of
Management

22 Aravali Institute of Management September 22, 2009