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What is dividend policy?

Its the decision to pay out earnings versus retaining and reinvesting
them. Includes these elements:
1. High or low payout?
2. Stable or irregular dividends?
3. How frequent?
4. Do we announce the policy?
Do investors prefer high or low
payouts? There are three theories:

Dividends are irrelevant: Investors dont care about payout.

Bird in the hand: Investors prefer a high payout.
Tax preference: Investors prefer a low payout, hence growth.
Dividend Irrelevance Theory
Investors are indifferent between dividends and retention-generated capital
gains. If they want cash, they can sell stock. If they dont want cash, they
can use dividends to buy stock.
Modigliani-Miller support irrelevance.
Theory is based on unrealistic assumptions (no taxes or brokerage costs),
hence may not be true. Need empirical test.
Bird-in-the-Hand Theory
Investors think dividends are less risky than potential future
capital gains, hence they like dividends.
If so, investors would value high payout firms more highly, i.e., a
high payout would result in a high P0.
Tax Preference Theory
Retained earnings lead to long-term capital gains, which are taxed
at lower rates than dividends: 20% vs. up to 39.6%. Capital gains
taxes are also deferred.
This could cause investors to prefer firms with low payouts, i.e., a
high payout results in a low P0.
Implications of 3 Theories for

Theory Implication
Irrelevance Any payout OK
Bird in the hand Set high payout
Tax preference Set low payout

But which, if any, is correct???

Treasury management is defined as the
corporate handling of all financial matters,
the generation of external and internal
funds for business, the management of
currencies and cash flows and the
complex strategies, policies and
procedures of corporate finance.
Role and Functions of

The Treasurer will maintain the cordial relationship with

the banks and involve in working capital and money
management. The Treasurer will ensure that the business
has the liquid funds it needs and invest surplus funds. The
Treasurer should have thorough knowledge of funding
requirements of the organization, sources of finance
available and the cost of those sources and the risk
attached to it.
The Treasurer would be responsible for providing the
business with forecasts of exchange rate movements,
exposure to currency risk and interest rate risk. He should
adopt appropriate strategies for foreign exchange risk
management. He should be able to advise effectively on
policies such as international transfer pricing, international
tax policies and its impact on firm.
The important functions of a
Treasurer of a multinational
company are as follows:
1. Corporate Financial Planning:
(a) Setting up of financial objectives, plans and strategies.
(b) Setting up of financial and treasury policies.
(c) Setting up of financial and treasury systems.
(d) Establishment of credit policies and control procedures.
(e) Establishment of policies and procedures for receipt and
disbursement of funds.
(f) Setting up centralized or decentralized treasury
management procedures.
2. Cash Management:
(a) Forecasting of cash requirements and preparation of cash budgets.
(b) Estimation of working capital requirements and planning the levels of
investment in current assets.
(c) Establishment of banking relationships, arrangement of funds for working
capital requirements, providing of security for working capital finance.
(d) Monitoring the credit collection.
(e) Monitoring the liquidity and funds position of different divisions of the firm.
(f) Investment of temporary surplus funds in short-term marketable securities
and sale of it when the need of cash arises.
(g) Ascertainment of collection and payment floats, efficient playing of the float
(h) Transmission of funds to various divisions and receipt of funds from various
collection centres.
(i) Ensure that sufficient cash is available for meeting day to day financial
(j) Maintaining sufficient cushion for meeting contingencies and unexpected
financial obligations.
3. Funding Management:
(a) Planning of short-term, medium-term and long-term cash needs.
(b) Setting of funding policies and procedures.
(c) Participation in financial decisions like, corporate structuring,
dividend payment, buyback of shares, redemption of debentures etc.
(d) Identification of sources of funds and cost-benefit analysis of
different sources of funding.
(e) Procurement and raising of funds from various sources like issue of
shares and debentures, raising of term-loans from banks and financial
institutions etc.
4. Currency Management:
(a) Setting up of policies and procedures relating to currency
(b) Hedging of currency rate risk and interest rate risk through
various financial derivative instruments and techniques.
(c) Monitoring of trends in international business, economic
(d) Complying with exchange regulations of various countries.
(e) Settlement of intragroup indebtedness.
5. Corporate Finance:
(a) Advising on proposals relating business acquisition and disposal, mergers and
takeover, buy back of shares, diversification and divestment decisions.
(b) Advising on project finance, foreign collaborations and joint ventures.
(c) Advising on long-term funds management.
(d) Planning for redemption debentures and bonds, repayment of term loans,
restructuring and financial reorganization, financial re-engineering etc.
(e) Steps to reduce the cost of funds and weighted average cost of capital.
(f) Monitoring of trends in capital market, debt market, government policies and
regulations, inflationary tendency etc. and its impact on corporate finance.