Dividend Decision - 2104 Words

Financial Management Unit 15 Unit 15 Structure 15.1 Introduction 15.2 Traditional Approach 15.3 Dividend Relevance Model 15.3.1 15.3.2 Walter Model Gordon’s Dividend Capitalization Model Dividend Decision 15.4 Dividend Irrelevance Theory: Miller and Modigliani Model 15.5 Stability of Dividends 15.6 Forms of Dividends 15.7 Stock Split 15.8 Summary Terminal Questions Answers to SAQs and TQs 15.1 Introduction Dividends are that portion of a firm’s net earnings paid to the shareholders. Preference shareholders are entitled to a fixed rate of dividend irrespective of the firm’s earnings. Equity holders’ dividends fluctuate year after year. It depends on what portion of earnings is to be†¦show more content†¦Symbolically, P = [m (D+E/3)] Where P is the market price, M is the multiplier, D is dividend per share, E is Earnings per share. Drawbacks of the Traditional Approach: As per this approach, there is a direct relationship between P/E ratios and dividend pay ­out ratio. High dividend pay ­out ratio will increase the P/E ratio and low dividend pay ­out ratio will decrease the P/E ratio. This may not always be true. A company’s share prices may rise in spite of low dividends due to other factors. 15.3 Dividend Relevance Model Under this section we examine two theories – Walter Model and Gordon Model. 15.3.1 Walter Model Prof. James E. Walter considers dividend pay ­outs are relevant and have a bearing on the share prices of the firm. He further states, investment policies of a firm cannot be separated from its dividend policy and both are inter ­linked. The choice of an appropriate dividend policy affects the value of the firm. His model clearly establishes a relationship between the firm’s rate of return r, its cost of capital k, to give a dividend policy that maximizes shareholders’ wealth. The firmShow MoreRelatedFactors Influencing The Decision Of Dividend Payout1987 Words   |  8 PagesBackground study Dividend payout policy has been one of the most important issues of financial literature, which is debated not only in the developed countries but also in the global. There are a number of researchers investigating about factors influencing on the decision of dividend payout’s managers in their companies. This issue needs to be considered because of several reasons such as affection companies’ capital structure and reaction of investors towards companies in the future. Dividend policy refersRead MoreFactors That Firms Consider When Making Dividend Policy Decisions Essay2125 Words   |  9 Pages Discuss factors that firms consider when making dividend policy decisions. Dividend policy is guidelines companies use to pay out earnings to shareholders. Dividend policy is mainly concerned about decisions in regards to dividends and retained earnings (Lintner, 1956). 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EXAMINE THIS STATEMENT CRITICALLY A SEMINAR PAPER PRESENTED IN PARTIAL FULFILMENT OF COURSE REQUIREMENT FOR MANAGERIAL FINANCE BY EMUCHAY KENNETH AZUBUIKE M.SC / FINANCE MATRIC NO: LUC/PG/09/ LEAD CITY UNIVERSITY, IBADAN LECTURER: PROF WOLE ADEWUMI INTRODUCTION: In illustratingRead MoreDividend Policy At Linear Technology762 Words   |  4 PagesXiaoling Tang FIN 46059 Summer2015 William Billik 08/04/2015 Dividend Policy at Linear Technology Linear Technology dividend policy is considered a dividend stability policy because of the approach in its allocation. Different from the residual and hybrid approaches, it involves paying dividends in quarters. The quarterly dividends are paid considering fractions of the yearly earnings. 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Dividend Policy of FPL Group’s case is about if investors should buy, sell, or hold the decreasing shares of FPL stock. Florida Power amp; Light (FPL) is one of the largest electrical companies in the United States. An analyst from Merrill Lynch downgraded the FPL stock after months of decreasing share price. On May 5th 1994, Florida Power amp; Lights’ stock price fell by 6 per cent after that analysis. From September of 1993 to May of 1994 the