Oct 23, · Article 2: Listed companies shall firmly establish an awareness to reward shareholders, improve cash dividend distribution strictly in accordance with the Company Law, the Securities Law, and their articles of association; maintain consistency, rationality, and stability of dividend distribution policies; and ensure truthfulness of disclosure of dividend distribution Dividend Policy Essay. Dividend policy can be described as a policy which devised the guidelines, rules, and procedures for paying out the dividends to company’s shareholders. Basically the policy is used to decide how much of company’s earnings will be paid out to shareholders in the form of dividends Jan 23, · 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
Dividend Policy in Business | Free Essay Example
Selling of ordinary shares to the existing shareholders of the company to raise capital is called right issues. The law necessitates that the new ordinary shares must be first issued to the existing shareholders on a pro rata basis.
Shareholders through a special resolution can forfeit this pre-emptive right. Obviously, this will dilute their ownership. A company can make rights offering to its shareholders after meeting the requirements specified by the Securities and Exchange Board of UK SEB, dividend policy essay, UK.
Those shareholders who renounce their rights are not entitled for additional shares. Shares becoming available on account of non-exercise of rights are allotted to shareholders who have applied for additional shares on pro rata basis. Any balance of shares left after issuing the additional shares can be sold in the open market. The provision is that share may be traded bought and sold a few days before the holder-of-the-register-of-members date and it may not be transferred and registered in the new name.
The rights might then be imperfectly sent to the old shareholder. If the share is traded within the ex-rights date, it will be duly registered in the name of purchaser. The ex-rights date occurs a few days prior to the holder-of-the-register-of-member date. This implies that after the ex-rights date the share sells without the rights. The price of the share before the ex-rights date is called as right-on or cum-rights while the price after this date is referred to as the ex-rights price.
Along with the letter of rights, dividend policy essay, four forms may be sent. Form A is intended for accepting the rights and applying for additional shares.
Form B is meant for the purpose of forgoing the rights in favour of other person, dividend policy essay. Form C has to be used by the person in whose favour the rights have been renounced for making application.
Form D is for the purpose of requesting for the split forms. When rights are offered for raising funds, three issues are involved:. Let us assume that RBS announces on 2 nd January that all Shareholders whose names are in the register of members as on 25 th February will be issued rights, which will expire on 10 th march In the example, 2 nd January is the announcement date; 25 th February is the holder- of-the-register-of-members date, 5 th April is the offer-of-rights date and 10 th march is the expiration-of-rights date.
It may be possible that the share may be traded thought and sold a few days before the holder- of-the-register-of-members date 5 th April in the exampleand it may not be transferred and registered in the new name. The rights then be wrongly sent to the old Shareholder. If dividend policy essay share is traded within the ex-rights date, dividend policy essay, it will be duly registered in the name of purchasers. The ex-rights date occurs a few days prior to the holder- of-the-register-of-members date, dividend policy essay.
From the calculations of the value of a right when the share is selling ex-rights, or cum-rights, dividend policy essay, it should be clear that the existing shareholder dividend policy essay not benefit or lose from rights issue.
What shareholder receives in dividend policy essay form of the value of a right, and loses in the form of decline in share price. Wealth remains unaffected when shareholders exercises his rights, dividend policy essay. Of course, he will lose if he does not exercise his rights or sells them. The risk of a portfolio of securities is measured by its variance or standard deviation.
The variance of a portfolio is the sum of:. In dividend policy essay well-diversified portfolio the weights of individual securities will be very small and therefore, the variances of individual securities will be quite insignificant. But the covariance between the securities will be significant, and its magnitude will depend on the correlation coefficients dividend policy essay securities.
The covariance will be negative if all securities in the portfolio are negatively correlated. In practice, securities may have some correlation because they all have a tendency to move with market. This logic introduces the concepts of diversifiable risk and non-diversifiable risk. The unique or the unsystematic risk of a security can be diversified when it is combined with other securities to form a well-diversified portfolio. On the other hand, the market or the systematic risk of also moves with the market.
Estimation of beta, β followed two method or model. Methods of beta estimation are explained as follow. In practice, the market portfolio is approximated by a well diversified share price index.
In theory, the market portfolio should include all risky assets-shares, dividend policy essay, gold, silver, real estate, art objects etc. In computing beta by regression, we need data on returns on market index and the security for which dividend policy essay is estimated over a period of time.
There is no theoretically determined time period and time interval may vary. The return may be measured on a daily, dividend policy essay, weekly or monthly basis. One should have sufficient number of observation over a reasonable period of time.
A number of agencies providing the beta values in developed countries like the USA and the UK use monthly returns for five year period for estimate beta.
The return on share and market index may be calculated as total return; that is, dividend yield plus capital gain:. A further modification may be made in calculating the return as shown below:. Firms may raise equity capital internally by retaining earnings.
Alternatively, they could distribute the entire earnings to equity shareholders and raise equity capital dividend policy essay by issuing new shares.
In both cases, shareholders are providing funds to the firms to finance their dividend policy essay expenditures. The firm may have to issue new shares at a price lower than the current market price. Also, it may have dividend policy essay incur flotation costs.
Thus, external equity will cost more to the firm than the internal equity. It is some time argued that the equity capital is free of cost. The reason for such argument is that it is not legally binding for firms to pay dividends to ordinary shareholders. Further, unlike the interest rate, the equity dividend rate is not fixed. It is fallacious to assume equity capital to be free of cost.
As we have discussed earlier, equity capital involves an opportunity cost; ordinary shareholders supply funds to the firms in dividend policy essay expectation to dividends and capital gains commensurate with their risk of investment, dividend policy essay. The market value of the shares determined by the demand and supply forces in a well functioning capital market reflects the return required by ordinary shareholders.
In practice, it is formidable task to measure the cost of equity. The difficulty derives from two factors: first, it is very difficult to estimate dividend policy essay expected dividends. Second the future earnings and dividends are expected to grow over time, dividend policy essay. Growth in dividends should be estimated and incorporated in the computation of the cost of equity.
The estimation of growth is not easy task. Keeping these difficulties in mind, the methods of computing the cost of internal and external are discussed below:.
The opportunity cost of retained earnings is the return forgone by equity shareholders. The shareholders generally except dividend and capital gain from their investment. The required rate of return of shareholders can be determined from the dividend valuation model. Normal growth: The dividend valuation model for firms whose dividends are excepted to grow at a constant rate of g is as follows:. Supernatural growth: a firm may pass through different phases of growth.
Hence dividends may grow at different rates in future. The growth may be very high for a few years, and afterwards, dividend policy essay, it may be become normal indefinitely in the future. The dividend-evaluation model can also be used to calculate dividend policy essay cost of equity under different growth assumptions. The minimum rate of return, dividend policy essay the equity shareholders require on funds supplied by them by purchasing new shares to prevent a decline in the existing market price of the equity share, is the cost of external equity, dividend policy essay.
The firm can dividend policy essay the existing or potential shareholders to purchase the new shares when it promises to earn a rate of return equal to:. The Cost of external equity is, however, grater than the cost of internal equity for one reason.
The selling price of the new shares may be less than the market price, dividend policy essay. The dividend-growth approach has limited application in practice because of its two assumptions. First, it assumes that the dividend per share will grow at a constant rate, g, should be less than the cost of equity, k e, dividend policy essay, to arrive at the simple growth formula. That is:. this view is based on the assumption that under conditions of uncertainty, investors tend to discount distant dividends capital gains at a higher rate than they discount near dividends.
Investors, behaving rationally, are risk-averse and, therefore, have a preference for near dividends to future dividends. If the firm assumed to retain fraction of earnings, dividend share will be equal to 1-b EPS 1 in the first year. The Dividend decision of the firm is yet another essential area of financial management. The significant aspect of dividend policy is to settle on the amount of earnings to be distributed to shareholders and the amount to be retained in the firm.
Retained earnings are the most significant internal sources of financing the growth of the firm. Consider an example to highlight the issues underlying the dividend policy. Payout ratio- which is dividend as a percentage of earnings- is an important concept vis-à-vis the dividend policy. Here dividend policy essay chosen company is RBS Royal Bank of Scotland. To be successful the current dividend policy is based on the following assumptions:.
Dividend can be defined as a taxable payment that is simply declared by board of directors of a company. It is usually given on quarterly basis to the shareholders of the company from the retained earnings.
For that, they like to pay them out of shareholders, it is called Payout also. The listed large companies, which have subsidiaries, dividends, can be paid in the form of shares. This similarity is due to the similarities of assumptions that underline both the models. Thus the Gordon model suffers from that underline as the others.
What is DIVIDEND POLICY? What does DIVIDEND POLICY mean? DIVIDEND POLICY meaning
, time: 2:46Dividend Policy - Term Paper
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 Jan 23, · 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 Jun 17, · Dividend Policy for Home Retail Group Plc. Words: Length: 6 Pages Document Type: Essay Paper #: Read Full Paper. Dividend Policy for Home Retail Group Plc and Yell Group Plc , , Once a company is profitable, the executives must determine what to
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