Revise Lecture 31

• Alternative Forms Of Dividends

Alternative Forms Of Dividends

In addition to the declaration of cash dividends, the firm has other options for distributing profits to shareholders.These options are the;1. Stock dividend2. Stock split3. Stock repurchase

Stock Dividend

Stock DividendA stock dividend occurs when the board of directors authorizes a distribution of common stock to existing shareholders.This has the effect of increasing the number of outstanding shares of the firm’s stock.

Stock Dividend

There are several aspects of a stock dividend;

1. Conserves cash2. Indicate higher future profits3. Raises future dividends for investors4. Has high psychological value5. Retain proportional ownership for

shareholders

Stock Splits

• A stock split is a change in the number of outstanding shares of stock achieved through a proportional reduction or increase in the par value of the stock. Only the par value and number of outstanding shares are effected. The amounts in the common stock contributed capital and retained earnings accounts do not change.

Stock Splits

Several reasons may be offered for the splitting of a firm’s common stock as follows;

1. Reduction of market price of stock2. Indication of growth3. Reverse split

Repurchase of Stock

A repurchase of stock occurs when a firm buys back outstanding shares of its own common stock. Firms repurchase stock for three major reasons;1. For stock options2. For acquisitions3. For retiring the stock

Developing dividend policies

• The dividend decision should reflect the different factors as well as the firm’s present operating and financial position.

• The firm finds that it has a choice of several dividend policies to follow.

Developing dividend policies

There are different dividend policies;

1. Steady dividends at the present level2. Steady dividends at a lower level3. Steady dividends at a higher level4. Dividends fluctuating with earnings5. Low regular dividends plus extra dividends6. Eliminate the dividend entirely

Developing dividend policies

Steady dividends at the present level• Perhaps the most common dividend decision is to

declare the same Rs dividend as paid last period. This meets the shareholders expectations for current income and is not likely to affect market price.

• This policy may result in shortages of funds during years when earnings have declined. For mature firms with unused borrowing capacity, this is not a serious drawback.

Developing dividend policies

Steady dividends at a lower level• The decision to reduce dividends would be

considered if the firm has high profit investment opportunities and needs the funds to finance them.

• This might alienate stockholders seeking current income and affect the market price of the stock.

Developing dividend policies

Steady dividends at higher level• This is a decision to raise the regular dividend

declared by the firm. It is warranted when the firm’s earnings have risen, when the earnings are stable at the higher level and when the firm does not need the excess earnings to finance growth.

• Frequently, the dividend announcement will favourably affect the price of the common stock.

Developing dividend policies

Dividend fluctuating with earningsA less desirable policy is to allow the firm’s dividend level to fluctuate with its earnings. The advantage to this policy is that it affords management maximum flexibility in retaining funds to finance investment. This advantage is offset by the uncertainty of dividend payments, which results in relatively low prices for the common stock of firm using this approach

Developing dividend policies

Low regular dividends plus extra dividendsThis policy would be appropriate for a firm with cyclical earnings and limited opportunities for growth.In a good earnings year, the firm would declare an extra dividend. This approach offers a great deal of flexibility to a firm that might otherwise have excess funds on hand.

Developing dividend policies

Eliminate the dividend entirely• Usually this is policy of last resort. There are

two reasons for this dividend decision. • First, the firm may be experiencing serious

financial difficulties and may be unable to pay dividend.

• Second, the firm may have extremely attractive investment opportunities and may need to retain earnings to finance them.

Developing dividend policies

Eliminate the dividend entirely• In this case, the firm can minimize adverse

effects on the stock price by carefully explaining the reason for the elimination of the dividend and by indicating that the dividend will be resumed as soon as the funds are no longer needed for expansion.

FDM

• Overview of Financial Management

• Financial securities and Markets

• A review of Financial Accounting

FDM

• Financial Statements

• Financial Analysis

• Leverage

FDM

• Introduction of Working Capital Management

• Working capital Cash Management

• Working Capital Stock Management

FDM

• Working Capital Debtors Management

• Valuation of the Firm

• Merger and Acquisitions

• Dividend Policies and decisions