...ABSTRACT This report focuses on the concept of Dividend Policy used in a firm. It talks about the importance of using a Dividend Policy which is giving a share to the stockholders. A dividend policy is first known as a heavy factor in a company’s stock value and is a set of company rules and guidelines used to decide how much the company will pay out to its shareholders. The report then highlights the common theories and models used in dividend policy decision in an organization. The feasibility of the concept had been further exemplified with the case study of City Lodge Hotels Limited and Microsoft vs Berkshire Hathaway which depicts two companies that do not believe in using a dividend policy and a lodging company that believes in keeping dividends. Keywords Dividend Policy, Residual Dividend Policy, Shareholders, Walter Model, MM Model, Dividend Irrelevancy. INTRODUCTION Dividend policy is the policy used by a company to decide how much it will pay out to shareholders in dividends. In financial accounting course, it is said that after deducting expense from the revenue, a company generates profit. Part of the profit is kept in the company as retained earnings and the other part is distributed as dividends to shareholders. From the share valuation model, the value of a share depends very much on the amount of dividend distributed to shareholders. Deciding on the amount of earnings to pay out as dividends is one of the major financial decisions that a firm’s managers...
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... Corporate Dividend Policy Authors Henri Servaes Professor of Finance London Business School The Theory and Practice of Corporate Dividend and Share Repurchase Policy Peter Tufano Sylvan C. Coleman Professor of Financial Management Harvard Business School Editors James Ballingall Capital Structure and Risk Management Advisory Deutsche Bank +44 20 7547 6738 james.ballingall@db.com Adrian Crockett Head of Capital Structure and Risk Management Advisory, Europe & Asia Deutsche Bank +44 20 7547 2779 adrian.crockett@db.com Roger Heine Global Head of Liability Strategies Group Deutsche Bank +1 212 250 7074 roger.heine@db.com The Theory and Practice of Corporate Dividend and Share Repurchase Policy February 2006 Executive Summary This paper discusses the theory and practice of corporate dividend and share repurchase policy drawing on the results of a recent survey. Theoretical Considerations The table below lists the factors that are important in the choice between dividends and repurchases as a payout mechanism Factor Taxes Conveying information Management bonding Shareholder rights Investor preferences Attracting monitors Managing EPS Changing capital structure Residual policy Dominating Payout Form Depends Depends on time horizon Dividends Depends on other factors Depends on preferences Depends on other factors Repurchases Depends on other factors Depends on other factors Survey Results Dividends continue to be the most important distribution...
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...“The dividend decision is unimportant to the wellbeing of a company.” Discuss Stock is a product of socialization production, and the earliest stock can be tracked back to 17th century. In terms of stock, dividend decision is an important concept, which can not be ignored. Dividend decision is defined as ‘Determines the division of earnings between payments to shareholders and retained earnings.’ ( http://finance.mapsofworld.com/corporate-finance/investment-decision/dividend.html ) Dividend decision is also called dividend policy, which has always been disputed. However, no matter how it is debated, dividend policy is very important to the healthy and orderly operation of a company. In the fist place,this essay will discuss the effect of different dividend policies on companies running, secondly indicate dividend decision should be changed to be fit for different growth periods and various investment opportunities, thirdly investigate how the refunding ability and cost of a company are affected by dividend policies, after that this paper will talks about the relationship between dividend decision and the structures of control rights to an enterprise, finally this article will evaluate the M&M theory and further prove that the importance of dividend policies for a corporation. There are diverse types of dividend policy, and each policy has different influence on corporations. Generally,Constant Payout Ratio (CPR), Constant Dollar Dividend Policy(CD), and Regular with Extras...
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...Contents 1. Introduction 2 2. Dividend payout theories 2 3. Change in dividends only because of necessarily 3 4. Clientele Dividend of Shareholders 6 5. The Taxes Liability as an Effect on Dividend Policy 7 6. Conclusion 7 References 8 1. Introduction Dividend indicates a share profit delivered to shareholders regarding to certain payout ratio. An efficient firm normally saves their finance to wait opportunities from acquisitions which affects earnings realistically. Afterward, the firms can make decision on whether to buy back their shares with their dividend income or to adopt to apply on other activities. However, the decision is depended on many internal and external factors which need to be considered carefully. 2. Dividend payout theories Up to date, dividend policy is a controversial debate in following components: - Level of dividend payment. - Stability of dividends. - Frequency - Dividend announcement. - Investors’ preference. There are three theories related to three theories to the debate: - Dividends are irrelevant - Bird in the hand. - Tax preference. Company managers have less interest on cutting dividends and raising dividend since a stable level of dividend payment might be preferred by investors. The reason behind is that dividend change is considered as signals of management’s view of the future. As such, a change (increase...
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...factors that influence dividend payout for firms listed on the London Stock Exchange and 32 firms were randomly selected covering a period of nine years (2004 – 2009). In other to reach a better understanding of the study, relevant literature reviews and some empirical research studies on dividend policy were critically examined. Six explanatory variables were chosen to be the predictor of dividend payout, which are liquidity, leverage, profitability, firm size, growth opportunities and cash flow. However, this study has confirmed that profitability and liquidity are important determinants of dividend policy in a UK firm. 5.2 Recommendation Based on the findings from the analysis, the following recommendations are made for firms: (i) Profitability in the firm must always be maintained. This is because a profitable business implies that cash would be available to distribute to the shareholders. The level of profitability must always be in focus for the firm; if it is to attain any considerable improvement in its dividend policy. (ii) The firm’s liquidity must be sustained over time. This implies that the firm’s policy must strive to maintain a relatively high ratio of current assets to current liability. This ensures a sustainable higher dividend payment policy for the firm. (iii) The firm should always consider its capital structure if it is to maintain improved dividend policy over time. A high level of liabilities does not go well with dividend payment. The liability...
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...SURVEY OF THE FACTORS IMPACTING ON DIVIDEND POLICY OF FIRMS OPERATING IN THE FINANCIAL SECTOR OF MAURITIUS 1. In which sub-sector does your company operate in? Please tick the appropriate Banking Offshore Banking Insurance Re-Insurance Investment Leasing 2. Approximately how many employees work in your company? Please encircle the appropriate • Less than 10 • 10 – 19 • 20-49 • 50-99 • 100 and above 3. What type of dividend payout does your company distribute every year? Please encircle the appropriate • We do not pay dividend at all • We distribute a constant dividend pay out every year • We offer an increasing amount of dividend payments from year to year • We offer a decreasing amount of dividend from year to year • Our dividend payments fluctuates from year to year 4. Do you consider dividend policy to be important? Please tick the appropriate. Yes No 5. Why do you think a firm pays dividends? Please rate the following possible answers. (1=strongly disagree; 2=disagree; 3=no opinion; 4=agree; 5=strongly agree) • The payment of dividends encourages a firm’s managers to act in the interest of the firm’s outside shareholders. (…..) • The payment of dividends forces a firm to seek more external (debt or equity) financing, which subjects the firm to additional investor scrutiny. (…..) • Dividend policy plays an important role in determining firm capital...
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...THE ROLE OF DIVIDEND POLICY IN STOCK PRICE DETERMINATION IN TELECOMMUNICATION INDUSTRY: THE CASE OF PLDT AND GLOBE FATIMA KAYE A. DE CHAVEZ, LORELLA A. ESPELETA and LESLIE JOY A. PATIO College of Business and Accountancy University of Batangas ABSTRACT The issue of how much a company should pay its stockholders, as dividend is one that has been of concern to managers for a long time. The optimal dividend policy of a firm may be defined as the best dividend payout ratio the firm can adopt. But, what does "best" mean in this concept? This paper is an attempt to explain the effect of Dividend Policy on the Stock Prices by taking the top two Telecommunications Company namely Philippine Long Distance Telephone Company and Globe Telecom. Other various websites were reviewed to see the significance of these dividend policies on the determination of stock prices. Charts, tables and other significant information of these two telecommunication companies which have been evaluated served as the methodology used by the researchers. The study identified that these top two telecommunication companies have different dividend policies being implemented. This difference among the two companies does not have a significant impact as long as stock price determination is concerned. The study also showed that an increase or a positive change in the company's dividend ratio gives a higher dividend among stockholders, yet several minor reductions to dividends have occurred due to capital acquisition...
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...“IMPACT OF DIVIDEND ON STOCK PRICES” ABSTRACT The project aims to establish the impact of dividend on market price of a share. This has been done for individual companies in Steel sector. After studying the basic concepts of dividends and dividend policy I am able to get a proper perspective of the requirements of the project and also gain a better understanding of the results obtained. I have looked to find the relation between pre dividend price change and the dividend using regression analysis. Similarly, I have analyzed the relation between the post dividend price change and the dividend. It is a matter of fact that dividends are declared by a company primarily to generate capital and also at certain times to maintain the market sentiment. It is in the best interests of the company to maximize the market value of its share and companies use dividend as a tool to maintain their corporate image. However, the degree of correlation between the dividend and the market price is low which implies that several other internal and external factors affect the market value of shares. To gain a holistic picture, I also did a comparative study of two peers in a sector (steel)to better understand how the specific requirements of each sector also impact the dividend policy of a company. The conclusions derived from the analysis performed further consolidated theoretical knowledge and deviations were better understood. SYNOPSIS “Impact of...
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...Financial Policy Basics of Corporate Dividend Policy Objectives • What is a dividend policy? And how is the process structured? • What are different measures of dividend policy? • What does empirical evidence suggest about dividend policies? • Are there any differences in dividend policies across the world? • What are recent trends in dividend policy? 1 6/20/2016 Basics of Corporate Dividend Policy Dividend Policy and its Mechanics Dividend Policy • One of the decisions that a firm has to take is whether to share corporate profits with its shareholders or not. • And, if a firm decides to share its profits with shareholders, it has to make another decision: What percentage of profits should be shared? 2 6/20/2016 Dividend Policy • Dividends are the most common method of sharing corporate profits with the shareholders of a firm. They are paid out in the form of cash. • Dividends are, usually, taxable to the recipient in the year they are paid. • For each share owned, a declared amount of money is distributed. Thus, if a person owns 100 shares and the cash dividend is $0.50 per share, he will receive $50.00 (=100*$0.50) in total. Dividend Policy • Dividends are, generally, paid on a regular basis at the end of quarters, at the end of six months, or at the end of years. These dividends are also called regular dividends. • However, firms can also pay special dividends, which are non-recurring (one time) dividends. A special...
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...Effect Of Dividends On Stock Prices 1 EFFECT OF DIVIDENDS ON STOCK PRICES Effect of Dividends on Stock Prices– A Case of Chemical and Pharmaceutical Industry of Pakistan Kanwal Iqbal Khan University of Central Punjab, Lahore Proceedings of 2nd International Conference on Business Management (ISBN: 978-969-9368-06-6) Effect Of Dividends On Stock Prices 2 Abstract In Pakistan corporate sector is adversely facing competition due to economic downturn in the world and making efforts to survive in a competitive and uncertain economic environment. This study will help to improve dividend decisions of corporate sector through proper implementation of their dividend policies. This paper is an attempt to explain the effect of dividend announcements on stock prices of chemical and pharmaceutical industry of Pakistan. A sample of twenty five companies listed at KSE-100 Index is taken from the period of 2001to 2010. Results of this study is based on Fixed and Random Effect Model which is applied on Panel data to explain the relationship between dividends and stock prices after controlling the variables like Earnings per Share, Retention Ratio and Return on Equity. Results indicate that Cash Dividend, Retention Ratio and Return on Equity has significant positive relation with stock market prices and significantly explains the variations in the stock prices of chemical and pharmaceutical sector of Pakistan while Earnings per Share and Stock Dividends have negative insignificant...
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...Question The dividend discount model tells us that the value of a firm is equal to the present value of its expected dividend payments. Some firms have never paid dividends and have no intention of doing so. Does this mean that these firms are worth nothing? Discuss with reference to academic research and theory. Answer 719 words Two schools about dividend policy: relevant dividend theory and irrelevant dividend theory The dividend discount model tells us the value of a firm is equal to the value of its expected dividend payments. The dividend discount model provides a means of developing an explicit expected return for the stock market. Elaborations on the simple dividend discount model provide an important tool for comparing relative values across a sample of individual stocks. [pic] V is the value of the stock. Dt is the expected dividend payment at the year t. K is the discount rate. Dividend policy has always been a baffling problem of financial management. In theoretical circles there are two schools about dividend policy: relevant dividend view and irrelevant dividend view. Relevant dividend view: Farrar, Salwyn and Gordon are representatives of this theory. Their theory is that company's dividend distribution has an impact on the value of the company. Dividend payment is not dispensable, but very necessary. It is an important strategy of a company. If the company’s choice of the dividend payment policy on the stock market changes , the company's...
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...OF CORPORATE GOVERNANCE PRACTICES AND BOARD COMPOSITION ON DIVIDEND PAYOUT POLICIES ON NIFTY 50 COMPANIES (2000-2012) | RESEARCH PROPOSAL, BUSINESS RESEARCH METHODS | | 2/27/2013 2/27/2013 Abstract Purpose: The purpose of this study is to examine the relationship between Corporate Governance practices and corporate dividend policy in India. Design/methodology/approach: Data regarding ownership structure, dividend policies and board composition would be collected for 40 non-financial companies listed on National Stock Exchange in India. The period of investigation has been taken from 2000-2012. Regression models would be run to define the relationship and for estimation purpose. Potential Findings: Based on the some heuristics and back of mind observations it can be seen that board size and composition, extent of ownership of promoters, the amount of free float in the market, firm size and investment opportunities are positively and significantly associated with dividend policies and dividend payout decisions. On the contrary, there are some instances which show a negative relationship between profitability and dividend payouts indicating the need of reinvesting funds. A significant number of independent directors in the board also have an impact on the payout policies, albeit not a significant one. A number of positive NPV investment opportunities also bear a negative relationship with dividend payout as more money is retained to invest in these projects...
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...term ‘dividend policy’ refers to “the practice that management follows in making dividend payout decisions or, in other words, the size and pattern of cash distributions over time to shareholders” (Lease et al., 2000, p.29). This issue of dividend policy is one that has engaged managers since the birth of the modern commercial corporation. Surprisingly then dividend policy remains one of the most contested issues in finance. Dividend policy is concerned with financial policies regarding paying cash dividend in the present or paying an increased dividend at a later stage. Whether to issue dividends and what amount, is determined mainly on the basis of the company's unappropriated profit (excess cash) and influenced by the company's long-term earning power. When cash surplus exists and is not needed by the firm, then management is expected to Payout some or all of those surplus earnings in the form of cash dividends or to repurchase the company's stock through a share buyback program. Management must also choose the form of the dividend distribution, generally as cash dividends or via a share buyback. Various factors may be taken into consideration: where shareholders must pay tax on dividends, firms may elect to retain earnings or to perform a stock buyback, in both cases increasing the value of shares outstanding. Alternatively, some companies will pay "dividends" from stock rather than in cash. Our group have selected 3 journals related to the dividend policy in our...
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...“The dividend decision is unimportant to the wellbeing of a company.” Discuss Stock is a product of socialization production, and the earliest stock can be tracked back to 17th century. In terms of stock, dividend decision is an important concept, which can not be ignored. Dividend decision is defined as ‘Determines the division of earnings between payments to shareholders and retained earnings.’ ( http://finance.mapsofworld.com/corporate-finance/investment-decision/dividend.html ) Dividend decision is also called dividend policy, which has always been disputed. However, no matter how it is debated, dividend policy is very important to the healthy and orderly operation of a company. In the fist place,this essay will discuss the effect of different dividend policies on companies running, secondly indicate dividend decision should be changed to be fit for different growth periods and various investment opportunities, thirdly investigate how the refunding ability and cost of a company are affected by dividend policies, after that this paper will talks about the relationship between dividend decision and the structures of control rights to an enterprise, finally this article will evaluate the M&M theory and further prove that the importance of dividend policies for a corporation. There are diverse types of dividend policy, and each policy has different influence on corporations. Generally,Constant Payout Ratio (CPR), Constant Dollar Dividend Policy(CD), and Regular with...
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...There are three key factors that effect how Progressive’s proposed dividend policy will impact the company. First, dividend payout should reflect management’s decision to reinvest in projects that can provide a higher rate of return than shareholders would receive in the market. Second, the industry and market standard for dividend payout is widely held as slow steady growth. Failure to adhere to this norm can create adverse effects to the market value of the security. Third, the variable policy that Progressive is introducing is calculated in a way that does not consider the company’s true performance. By focusing on these three factors I believe that even though the new policy will initially increase shareholder dividends, it does not benefit the company overall. Companies don’t have many choices when it comes to their earnings; they either reinvest them in the company, pay out dividends to shareholders, or some combination of both. A company is free to choose how they will distribute their earnings but it is important to remember that a fundamental of dividend policy is determining plow back and payout ratios based on the ability to invest in projects that generate a return on investment greater than the required rate of return. Progressive’s proposed policy does not consider reinvestment policy at all; instead it simply uses an arbitrary formula that only looks at the company’s recent performance. Failure to set payout ratio based on reinvestment projects can leave...
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