DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) Stock Market places more weight on dividends than on retained earnings. Weight attached to Dividends is equal to 4 times the weight attached to retained earnings.

DIVIDEND POLICY TRADITIONAL MODEL( CONTD):- P = m ( D + D + R ) 3 = m 4D + mR 3 3 WHERE m = A MULTIPLIER D = Dividend per share R = Retained earnings. EARNINGS= D + R P = market price per share

DIVIDEND POLICY TRADITIONAL MODEL:- FINDINGS:- A LIBERAL PAY OUT POLICY HAS A FAVOURABLE IMPACT ON THE STOCK PRICE.

DIVIDEND POLICY WALTER MODEL:- P = D + (E – D) r/k k P = market price per share D =dividend per share E = earnings per share R = rate of return on investments K = cost of capital

DIVIDEND POLICY FINDINGS under Walter model: When r > k, price per share increases as the dividend payout ratio decreases. Optimal Payout ratio for a Growth firm ( r > k) is NIL WHEN R = K, price per share does not vary with changes in Dividend Payout ratio. Optimal Payout Ratio for a normal firm( r = k) is IRRELEVANT

DIVIDEND POLICY FINDINGS UNDER WALTER MODEL:- When r < k , price per share increases as the Dividend Payout Ratio increases. Optimum Payout Ratio for a Declining firm ( r < k) is 100%

DIVIDEND POLICY GORDON MODEL:- Pc = Ye ( 1 – b) k - b r Pc = Price per share at the beginning of the year Ye = Earnings per share at the end of the Year (1 – b) = Dividend Payout Ratio b = Retention Ratio k = Rate of return required by shareholders r = rate of return on investment

DIVIDEND POLICY FINDINGS IN GORDON MODEL:- SIMILAR TO WALTER MODEL: Optimum Payout Ratio for Growth firm ( r > k) = NIL The Payout Ratio for a normal firm (r =k) Is IRRELEVANT The declining firm ( r < k) attracts 100% Payout ratio

Dividend policy JOHN LINTNER MODEL:- Most firms think in terms of proportion of earnings to be paid as Dividend rather than proportion to be ploughed back. Firms try to reach out to the target pay-out ratio gradually over a period of time as stock holders prefer a steady progression in dividends.

DIVIDEND POLICY LINTNER MODEL:- Dc = CREPSc + (1 – C) D(c-1) Dc = Dividend per share for Current Year C = adjustment rate R = target payout rate EPSc = Earnings per share of Year c(current nyr) D(c-1)= Dividend rate per share for year c-1(last yr)

DIVIDEND POLICY FINDINGS OF LINTNER MODEL:- Current Dividend depends on partly on current earnings and partly on previous year dividend. Dividends can be described in terms of a weighted average of past earnings.

DIVIDEND POLICY MODIGLIANI & MILLER MODEL(MM MODEL) DIVIDEND Policy is irrelevant for determining market price of share. Market is perfect-investors go by earning power of the firm Investments & financial decisions are independent. Cost of Internal & External financing are equal.

DIVIDEND POLICY MM-MODEL(BASIC VALUATION MODEL):- Pc = De + Pe 1 + k Pc= current market price per share K = cost of capital De= dividend to be declared at the end of the year. Pe = market price at the end of the year.

DIVIDEND POLICY FINDINGS OF MM MODEL:- If Dividend not declared ,Share Price increases If Dividend declared, Share prices go down correspondingly

DIVIDEND POLICY CRITICISM OF MM POSITION:- Higher dividend sentiments Current income preference Transaction cost- selling/buying Taxation- Dividend/ Capital Gains Tax Investment Policy Cost of external finance-impact on R/E.

DIVIDEND POLICY MM MODEL:- CONCLUSIONS:- Factors suggesting Liberal Payout Ratio: Preference of current income Possibility of imprudent investment Transaction cost of conversion Factors suggesting Low Payout Ratio:- Capital Gains/ tax benefits Deferred income requirements Lower cost of retained earnings.

DIVIDEND POLICY SUMMARY Dividend Policy depends on a mixture of Factors as discussed and no single model can be adopted Universally.