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DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1. Stock Market places more weight on dividends than on retained earnings. 2. Weight attached to Dividends is equal to 4 times the weight attached to retained earnings.

DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1.Stock Market places more weight on dividends than on retained earnings. 2.Weight attached to Dividends

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Page 1: DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1.Stock Market places more weight on dividends than on retained earnings. 2.Weight attached to Dividends

DIVIDEND POLICY

TRADITIONAL MODEL

(GRAHAM & DODD)

1. Stock Market places more weight on dividends than on retained earnings.

2. Weight attached to Dividends is equal to 4 times the weight attached to retained earnings.

Page 2: DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1.Stock Market places more weight on dividends than on retained earnings. 2.Weight attached to Dividends

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

Page 3: DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1.Stock Market places more weight on dividends than on retained earnings. 2.Weight attached to Dividends

DIVIDEND POLICY

TRADITIONAL MODEL:-

FINDINGS:-

A LIBERAL PAY OUT POLICY HAS A FAVOURABLE IMPACT ON THE STOCK PRICE.

Page 4: DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1.Stock Market places more weight on dividends than on retained earnings. 2.Weight attached to Dividends

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

Page 5: DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1.Stock Market places more weight on dividends than on retained earnings. 2.Weight attached to Dividends

DIVIDEND POLICY

FINDINGS under Walter model:1) When r > k, price per share increases as the

dividend payout ratio decreases.Optimal Payout ratio for a Growth firm

( r > k) is NIL2) 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

Page 6: DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1.Stock Market places more weight on dividends than on retained earnings. 2.Weight attached to Dividends

DIVIDEND POLICY

FINDINGS UNDER WALTER MODEL:-

3) When r < k , price per share increases as the Dividend Payout Ratio increases.

Optimum Payout Ratio for a Declining firm ( r < k) is 100%

Page 7: DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1.Stock Market places more weight on dividends than on retained earnings. 2.Weight attached to Dividends

DIVIDEND POLICY

GORDON MODEL:-

Pc = Ye ( 1 – b)

k - b rPc = 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

Page 8: DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1.Stock Market places more weight on dividends than on retained earnings. 2.Weight attached to Dividends

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

Page 9: DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1.Stock Market places more weight on dividends than on retained earnings. 2.Weight attached to Dividends

Dividend policy

JOHN LINTNER MODEL:-1) Most firms think in terms of proportion of

earnings to be paid as Dividend rather than proportion to be ploughed back.

2) 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.

Page 10: DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1.Stock Market places more weight on dividends than on retained earnings. 2.Weight attached to 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)

Page 11: DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1.Stock Market places more weight on dividends than on retained earnings. 2.Weight attached to Dividends

DIVIDEND POLICY

FINDINGS OF LINTNER MODEL:-

1) Current Dividend depends on partly on current earnings and partly on previous year dividend.

2) Dividends can be described in terms of a weighted average of past earnings.

Page 12: DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1.Stock Market places more weight on dividends than on retained earnings. 2.Weight attached to Dividends

DIVIDEND POLICY

MODIGLIANI & MILLER MODEL(MM MODEL)

1. DIVIDEND Policy is irrelevant for determining market price of share.

2. Market is perfect-investors go by earning power of the firm

3. Investments & financial decisions are independent.

4. Cost of Internal & External financing are equal.

Page 13: DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1.Stock Market places more weight on dividends than on retained earnings. 2.Weight attached to Dividends

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.

Page 14: DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1.Stock Market places more weight on dividends than on retained earnings. 2.Weight attached to Dividends

DIVIDEND POLICY

FINDINGS OF MM MODEL:-

1. If Dividend not declared ,Share Price increases

2. If Dividend declared, Share prices go down correspondingly

Page 15: DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1.Stock Market places more weight on dividends than on retained earnings. 2.Weight attached to Dividends

DIVIDEND POLICY

CRITICISM OF MM POSITION:-

a) Higher dividend sentiments

b) Current income preference

c) Transaction cost- selling/buying

d) Taxation- Dividend/ Capital Gains Tax

e) Investment Policy

f) Cost of external finance-impact on R/E.

Page 16: DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1.Stock Market places more weight on dividends than on retained earnings. 2.Weight attached to Dividends

DIVIDEND POLICY

MM MODEL:- CONCLUSIONS:-Factors suggesting Liberal Payout Ratio:1) Preference of current income2) Possibility of imprudent investment3) Transaction cost of conversionFactors suggesting Low Payout Ratio:-1) Capital Gains/ tax benefits2) Deferred income requirements3) Lower cost of retained earnings.

Page 17: DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD) 1.Stock Market places more weight on dividends than on retained earnings. 2.Weight attached to Dividends

DIVIDEND POLICY

SUMMARY

Dividend Policy depends on a mixture of

Factors as discussed and no single model can be adopted Universally.