Dividend Decisions and Dividend Theories | CMA Inter Syllabus
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CMA Inter Blogs :
Dividend decision means the decision-making mechanism of the management regarding declaration of dividends. It is crucial decision for the top management to determine the portion of earnings available for the distribution as the dividend at the end of every financial year. A company’s ultimate objective is the maximization of shareholders’ wealth. It must, therefore, be very vigilant about its profit-sharing
policies to retain the faith of the shareholders. Dividend payout policies derive enormous importance by virtue of being a bridge between the company and shareholders for profit-sharing. Without an organized dividend policy, it would be difficult for the investors to judge the intentions of the management.
Dividend is a major cash outlay for many companies. At first glance, it would appear that a company could distribute as much as possible to please its shareholders. It might seem equally obvious that a firm could invest money for its shareholders instead of paying dividends.
A firm’s decisions about dividends are often mixed up with other financing and investment decisions. Some firms pay low dividends because management is optimistic about a firm’s future and wishes to retain earnings for expansion. Another firm might finance capital expenditures largely by borrowing. This releases cash for dividends.
The firm’s dividend policy must be isolated from other problems of financial management. The dividend policy is a trade-off between retained earnings on the one hand and paying out cash and issuing shares on the other. There are many firms that pay dividends and also issue stock from time to time. They could avoid the stock issues (where costs are highest for the firm) by paying lower dividends. Many other firms restrict dividends so that they do not have issue shares. They on the other hand could occasionally issue stock and increase dividends. Thus, both firms face dividend policy trade-off. There are many reasons for paying dividends and there are many reasons for not paying any dividends. As a result, dividend policy is always controversial.
However, different issues of dividend and dividend policies will be discussed in the following sections.
The term dividend refers to that portion of profit (after tax) or earnings or retained earnings which is distributed among the owners/shareholders of the firm. In other words, dividend is that part of the net earnings of a corporation that is distributed toits stockholders. It is a payment made to the equity shareholders for their investment in the company.
Dividend is a reward to equity shareholders for their investment in the company. It is a basic right of equity shareholders to get dividend from the earnings of a company.
There are different types of dividends. Classifications of dividends are based on the categary in which they are paid. Following are the different types of dividends:
a. Cash Dividend
It is the most common form. The shareholders receive cash for each share. The board of directors announces the dividend payment on the date of declaration.
b. Bonus Shares or Stock Dividend
Bonus share is also called the stock dividend. A company may have low operating cash but still want to keep the investors happy, issues such dividends. In other way, a stock dividend is simply the payment of additional shares of common stock to shareholders. It represents nothing more than a book-keeping shift within the shareholders’ equity account on the firm’s balance sheet. A shareholder’s proportional ownership in the firm remains unchanged. Accounting authorities make a distinction between small-percentage stock dividends and large-percentage stock dividends.
c. Property Dividend
The company makes the payment in the form of assets under the property dividend. The asset could be any of this equipment, inventory, vehicle, or any other asset. The asset’s value has to be restated at the fair value while issuing this.
d. Scrip Dividend
It is a promissory note to pay the shareholders later. This type is used when the company does not have sufficient funds for such issuance.
e. Liquidating Dividend
When the company returns the original capital contributed by the equity shareholders as a dividend, it is termed a liquidating dividend. It is often seen as a sign of closing down the company.
Dividend policy determines the ultimate distribution of the firm’s earnings between retention(i.e., reinvestment) and cash dividend payments of shareholders. It is the practice that management follows in making dividend payoutdecisions, or in other words, the size and pattern of cash distributions over the time to shareholders.
In other words, dividend policy is the firm’s plan of action to be followed when dividenddecisions are made. It is the decision about how much of earnings to pay out as dividendsversus retaining and reinvesting earnings in the firm.
Dividend policy must be evaluated in light of the objective of the firm namely, to choose apolicy that will maximize the value of the firm to its shareholders. The dividend policy of acompany reflects how prudent itsfinancial management is. The future prospects, expansion, diversification mergers are affecting by dividing policies and for a healthy and buoyant capitalmarket, both dividends and retained earnings are important factors.
Measures of Dividend Policy
Dividend Payout: It measures the percentage of earnings the company pays in dividends = Dividends / Earnings.
Dividend Yield: It measures the return that an investor can make from dividends alone = Dividends / Stock Price.
Earnings Yield: It measures how earnings are reflected in the share price = Earnings/Stock Price.
Why a dividend policy is important?
Once a company makes a profit, it must decide on what to do with those profits. They couldcontinue to retain the profits within the company, or they could pay out the profits to the ownersof the firm in the form of dividends. The dividend policy decision involves two questions:
However, the dividend policy of a company determines what proportion of earnings is distributed to the shareholders by way of dividends, and what proportion is ploughed back for reinvestment purposes. Since the main objective of financial management is to maximize the market value of equity shares, one key area of study is the relationship between the dividend policy and market price of equity shares. In this regard dividend policy assumes significance.
Determinants of Dividend Policy
Many factors determine the dividend policy of a company. The factors determining the dividend policy are discussed below:
The company’s Board of Directors makes dividend decisions. They are faced with the decision to pay out dividends or to reinvest the cash into new projects. The dividend policy decision is a trade-off between retaining earnings v/s paying out cash dividends.
Dividend policies must always consider two basic objectives:
While determining a firm’s dividend policy, management must find a balance between current income for stockholders (dividends) and future growth of the company (retained earnings).
In further analysis, we can explain this classification as follows –
1. Dividend Relevance Theory
The relevance theory of dividend argues that dividend decision affects the market value of the firm and therefore dividend matters. This theory suggests that investors are generally risk averse and would rather have dividends today (“bird-in-the-hand”) than possible share appreciation and dividends tomorrow. The relevance theory of dividend proposes that dividend policy affect the share price.
Therefore, according to this theory, optimal dividend policy should be determined which will ensure maximization of the wealth of the shareholders. Dividend relevance theory holds the belief that dividends have effect on a company’s stock price. A dividend is typically a cash payment made from a company’s profit to its shareholders as a reward for investing in the company. Relating to this theory, three models are discussed below:
Graham and Dodd Model (Traditional Model)
According to this model founded by Graham and Dodd, the market price of the shares will increase when a company declares a dividend rather than when it does not. Base of their arguments was that investors are rational and under conditions of uncertainty they turn risk averse. In this model weight attached to dividends is four times of weight attached to retained earnings.
Quantitatively,
P = m {D + (A/Q)}
Where:
P is the market price per share
m is a multiplier
D is the dividend per share
E is the earnings per share
Critics argue that Graham and Dodd provided weight subjectively and did not derive them from any empirical analysis.
Walter's Model
According to this model founded by James E. Walter, the dividend policy of a company has an impact on the share valuation, i.e., dividends are relevant. The key argument is support of the relevance proposition of Walter’s model is the relationship between the return on a firm’s investment (its internal rate of return) ‘r’ and its cost of capital (i.e. the required rate of return) ‘k’. If the return on investments exceeds the cost of capital, the firm should retain the earnings, whereas it should distribute the earnings to the shareholders in cash the required rate of return exceeds the expected return on the firm’s investments. The rationale is that if r>k, the firm is able to earn more than what the shareholders could by reinvesting, if the earnings are paid to them. The implication of r<k is that shareholders can earn a higher return by reinvesting elsewhere.
Quantitatively,
Where:
P = The prevailing market price of a share
D = Dividend per share
E = Earnings per share
r = The internal rate of return on the investments and
k = Cost of capital.
Assumptions of the model:
The impact of dividend payment on the share price is studied by comparing the rate of return with the cost of capital.
Limitations of the model:
Following are the limitations of the model:
Illustration 18
X Ltd. earns ₹ 6 per share having capitalisation rate @10% and has a return on investment at the rate of 20%. According to Walter’s Model, what should be the price per share at 30% dividend payout ratio? Is this the optimum payout ratio as per Walter Model?
Solution:
Illustration 19
From the following data calculate the value of an equity share of each of the following three companies according to Walter’s Model when dividend pay-out ratio is (i) Nil, (ii) 25%, (iii) 50%, (iv) 75% and (v) 100%.
| Nature of the Companies | |||
| X Ltd. | Y Ltd. | Z Ltd. | |
| Internal Rate of Return (r) | 15% | 5% | 10% |
| Cost of Capital (K) | 10% | 10% | 10% |
| Earning per share (E) | ₹ 10 | ₹ 10 | ₹ 10 |
What conclusion do you draw?
Solution:
Gordon's Model
According to this model founded by Myron Gordon, the dividend policy of the company has an impact on share valuation i.e., dividends are relevant. Myron J Gordon (1962) said that “... investors prefer the early resolution of uncertainty and are willing to pay a higher price of the shares that offer the greater current dividends.”
Gordon suggested -
The model is based on the following assumptions:
Quantitatively,
P = { Y (1-b) / k - br }
Where,
P is the price per share
Y is the earnings per share
b is the retention ratio
1-b is the payout ratio
br is the growth rate
r is the return on investment
k is the rate of return required by shareholders (also called capitalization rate)
On comparing r and k, the relationship between market price and the pay-out ratio is exactly the same as compared to the Walter model.
The crux of Gordon’s arguments is two-fold assumptions:
A company which retains earnings is perceived as risky as the future payment of dividend amount and timing is uncertain. Thus, they would discount future dividends, that is, they would place less importance on it as compared to current dividend. The above argument underlying Gordon’s model of dividend relevance is also described as bird-in-hand argument. i.e., what is available at present is preferable to what may be available in the future. Gordon argues the more distant the future is, the more uncertain it is likely to be.
Illustration 20
From the following data calculate the value of an Equity Share of each of the following three companies according to the Gordon’s Model when dividend payout ratio is (i) 25%, (ii) 50%, and (iii) 100%.
| Nature of the Companies | |||
| X Ltd. | Y Ltd. | Z Ltd. | |
| Internal Rate of Return (r) | 12% | 8% | 10% |
| Cost of Capital (K) | 10% | 10% | 10% |
| Earning per share (E) | ₹ 12 | ₹ 12 | ₹ 12 |
What conslusion do you draw?
Solution:
2. Dividend Irrelevance Theory
Dividend irrelevance theory holds the belief that dividends do not have any effect on a company’s stock price. A dividend is typically a cash payment made from a company’s profits to its shareholders as a reward for investing in the company. In this case, one school of thought argues that the dividends have no impact on the share price or market value of the firm. Here, we shall discuss mainly Miller–Modigliani (M-M) Model and some other models –
Miller and Modigliani (M-M)Model / Dividend Irrelevancy Model
This theory was proposed by Franco Modigliani and Merton Miller (M-M) in 1961 who argued that the value of the firm is determined by the basic earnings power, the firm’s risk and not by the distribution of earnings.
Miller–Modigliani (M-M) provide the most comprehensive argument for the irrelevance of dividends. They assert that, given the investment decision of the firm, the dividend payout ratio is a mere detail and that it does not affect the wealth of shareholders. M-M argue that the value of the firm is determined solely by the earnings power of the firm’s assets or its investment policy, and that the manner in which the earnings stream is split between dividends and retained earnings do not affect this value.
M-M hypothesis is based on the following assumption:
According to this model, the market price of the share does not depend on the dividend payout, i.e., the dividend policy is irrelevant. This model explains the irrelevance of the dividend policy.
When profits are used to declare dividends, then the market price increases. But, at the same time there is a fall in the reserves for reinvestment. Hence for expansion, the company raises additional capital by issuing new shares. Increase in the overall number of shares, will lead to a fall in the market price per share. Hence the shareholders would be indifferent towards the dividend policy.
According to the M-M Model, the market price of a share after dividend declared is calculated by applying the following formula:
P0 = { ( P1 + D1 ) / 1 + k }
Where,
P0 is the prevailing market price
k is the cost of equity capital
D1 is the dividend to be received at the end of period one
P1 is the market price at the end of period one
The number of shares to be issued for new projects, in lieu of dividend payments is given by the following formula:
m = { 1 - (E+nD1 ) / P1
Where,
n – is the number of shares outstanding at the beginning of the period.
m – is number of new shares issued.
I – Total investment amount required for the new project.
E – Earnings of net income of the firm during the period.
Proof:
Let n represent the original number of outstanding shares of the company, ‘D’ be the dividend distributed to the ‘n’ shareholders, I be the total investment amount required for the new project, and ‘E’ be the Earnings (net income) of the firm during the period. And let ‘m’ represent the number of new shares issued to meet the shortfall in investment issued at a current market price of P1.
According to the M-M Model, the market price of a share in the beginning of the period is equal to the present value of dividends paid at the end of the period plus the market price of the share at the end of the period. It is calculated by applying the following formula:
P0 = { ( P1 + D1 ) / 1 + k }
Where,
P0 is the prevailing market price.
k is the cost of equity capital.
D1 is the dividend to be received at the end of period one.
P1 is the market price at the end of period one.
Assuming no external financing and the current market capitalization of the firm would be calculated as follows:
nP0 = (nP1 + nD1) / 1 + k
n is the number of shares.
Adding and subtracting mP1 on numerator in the RHS of the equation, we have–
nP0 = { (m+n) nD1 – mP1 / 1 + k }
Now, mP1 = Amount raised = Investment – [Earnings – Dividends distributed]
= I – [E-nD1]
Substituting in the above equation, we have–
nP0 = (m+n)P1 + E – 1 / 1 + k
As no dividend term appear on the right-hand side of the equation, it is proved that dividends are irrelevant.
Criticisms:
Because of the unrealistic nature of the assumption, M-M’s hypothesis lacks practical relevance in the real-world situation. Thus, it is being criticised on the following grounds.
Illustration 21
Bangabasi Ltd. belongs to a risk-class for which the appropriate capitalisation rate is 10%. It currently has outstanding 2000 equity shares of ₹100 each. The firm is contemplating the declaration of dividend of ₹8 per share at the end of the current financial year. It expects to have net earnings of ₹20,000 and has a proposal for making new investment of ₹ 24,000. Show that under the Modigliani–Miller assumption, the payment of dividend does not affect the value of the firm.
Solution:
Rasiduals Theory of Dividends
The theory is based upon the assumptions that since the external financing has excessive costs and may not be available to the firm. The firm finances its investment by retained earnings or by retaining earnings. The retaining earnings are that portion of profits that is not distributed to the investors. If a firm wishes to avoid issue of shares, then it will have to rely on internally generated funds to finance new positive NPV projects. Dividends can only be paid out of what is left over. This leftover is called a residual and such a dividend policy is called residual dividend approach.
When we treat dividend policy as strictly a financing decision, the payment of cash dividends is a passive residual. The amount of dividend pay-out will fluctuate from period to period in keeping with fluctuations in the number of acceptable investment opportunities available to the firm. If these opportunities abound, the percentage of dividend payout is likely to be zero. On the other hand, if the firm is unable to find profitable investment opportunities, dividend payout will be 100%.
With a residual dividend policy, the firm’s objective is to meet its investment needs and mostly to maintain its desired debt equity ratio before paying dividends.
To illustrate imagine that a firm has ₹ 1,000 in earnings and a debt equity ratio of 0.5. Thus, the firm has 0.5 of debt for every 1.5 of the total value. The firm’s capital structure is 1/3 of debt and 2/3 of equity.
The first step in implementing a residual dividend policy is to determine the amount of funds that can be generated without selling new equity. If the firm reinvests the entire ₹ 1,000 and pays no dividend, then equity will increase by ₹ 1,000. To keep the debt equity ratio constant, the firm must borrow ₹ 500.
The second step is to decide whether or not the dividend will be paid. If funds needed are less than the funds generated then a dividend will be paid. The amount of dividend will be the residual after meeting investment needs. Suppose we require ₹ 900 for a project. Then 1/3 will be contributed by debt (i.e.,₹ 300) and the balance by equity/ retained earnings. Thus, the firm would borrow ₹ 300 and fund ₹ 600 from the retained earnings. The residual i.e., ₹ 1,000 – ₹ 600 = ₹ 400 would be distributed as dividend.
It can be further explained by using the table below: (₹)
| New Investment | Debt portion | Retained | Additional Earnings | Dividend Equity | |
| 1,000 | 3,000 | 1,000 | 1,000 | 1,000 | 0 |
| 1,000 | 2,000 | 667 | 1,000 | 333 | 0 |
| 1,000 | 1,500 | 500 | 1,000 | 0 | 0 |
| 1,000 | 1,000 | 333 | 667 | 0 | 333 |
| 1,000 | 500 | 167 | 333 | 0 | 667 |
| 1,000 | 0 | 0 | 0 | 0 | 1000 |
Dividend Discount Model
The dividend discount model is a more conservative variation of discounted cash flows that says a share of stock is worth the present value of its future dividends, rather than its earnings. This model was popularized by John Burr Williams in the theory of investment value.
Present earnings, outlook, financial condition, and capitalization should bear upon the price of a stock only as they assist buyers and sellers in estimating future dividends.
The Dividend Discount Model can be applied effectively only when a company is already distributing a significant amount of earnings as dividends. But in theory it applies to all cases, since even retained earnings should eventually turn into dividends. That’s because once a company reaches its ‘mature’ stage it won’t need to reinvest in its growth, so, management can begin distributing cash to the shareholders as Williams puts it.
If earnings not paid out as dividends are all successfully reinvested, then these earnings should produce dividends later if not, then they are money lost. In short, a stock is worth only what you can get out of it.
The dividend discount model (DDM) is a widely accepted stock valuation tool found in most introductory finance and investment textbooks. The model calculates the present value of the future dividends that a company is expected to pay to its shareholders It is particularly useful because it allows investors to determine an absolute or “intrinsic” value of a particular company that is not influenced by current stock market conditions. The DDM is also useful because the measurement of future dividends (as opposed to earnings for example) facilitates an “apples-to-apples” comparison of companies across different industries by focusing on the actual cash investors can expect to receive.
There are three alternative dividend discount models that used to determine the intrinsic value of a share of stock:
Constant dividends:
P = D1 / ke
Where,
P = Intrinsic value
D1 = Expected dividend
Ke = Appropriate discount factor for the investment
This method is useful for analyzing preferred shares where the dividend is fixed. However, the constant dividend model is limited in that it does not allow for future growth in the dividend payments for growth industries. As a result, the constant growth dividend model may be more useful in examining a firm.
Constant dividend growth:
P = D1 / (ke – g)
Where,
P = Intrinsic value
D1 = expected dividend
ke = appropriate discount factor for the investment g = constant dividend growth rate
The constant dividend growth model is useful for mature industries, where the dividend growth is likely to be steady. Most mature blue-chip stocks may be analysed quickly with the constant dividend growth model. This model has its limitations when considering a firm which is in its growth phase and will move into a mature phase at some time the future. A two-stage growth dividend model may be utilized in such situations. This model allows for adjustment to the assumptions of timing and magnitude of the growth of the firm.
For initial dividend growth & then steady growth:
Where:
P = Instrinsic value = PV of dividends + PV of price
D1 = Expected dividend
= Appropriate discount factor for the investment
= Initial dividend growth rate
= Steady dividend growth rate
Lintner Model
John Linter surveyed dividend behaviour of several corporate and showed that–
Linter expressed corporate dividend behaviour in the form of a following model:
Dt = crEPSt + (1-c)Dt-1
Dt = DPS for year t
c = Adjustment Rate or Speed or Adjustment
r = Target Payout Rate
EPS1 =EPS for year t
Dt-1 = DPS for year t–1
The Linter model shows that the current dividend depends partly on current earnings and partly on previous year’s dividend. Likewise, the dividend for the previous year depends on the earnings of that year and the dividend for the year preceding that year, so on and so forth. Thus, as per the Linter Model, dividends can be described in terms of a weighted average of past earnings.
Dividend Dates
Declaration date: The date on which board of directors declare dividend is called a declaration date.
Record date: Record date, is that date when the company closes its stock transfer books and makes up a list of the shareholders for payment of dividends.
Ex-dividend date: It is that date notified by the stock exchange, as a date which will entail a buyer of shares, the dividend, if bought before the ex-dividend date. This date sets up the convention of declaring that the right to the dividend remains with the stock until ‘x’ days prior to the Record date. Thus, whoever buys share on or beyond the ex-dividend date are not entitled to dividend.
Payment date: The date on which the company mails the cheques to the recorded holders.
Let us say, settlement of stocks follows ‘T+3’, which means that, when you buy a stock, it takes three days from the transaction date (T) for the change to be entered into the company’s record books. As mentioned, if you are not in the company’s recorded books on the date of record, you won’t receive the dividend payment. To ensure that you are in the record books, you need to buy stock at least three days before the date of record, which also happens to be the day before the ex-dividend date.
Because a company’s dividends are sometimes not paid regularly, a company may choose to pay dividends in the form of stock. Assume a company declares a 10% stock dividend. What happens is that for every 10 shares of stock a person owns he gets one new share as a dividend. If a corporation has 1,000,000 share of common stock outstanding and declares a 10% stock dividend, the corporation will have 1,100,000 shares of stock outstanding after the stock dividend is paid.
The individual investor maintains his proportionate share and the same total book value in the company. Book value per share will be less. However, his investment in the company remains the same.When a company issues a stock dividend, it retains its accumulated earnings. Therefore, some companies may want to issue a stock dividend to avoid paying out cash. They may want to use the cash elsewhere. Basically, the company is capitalizing their earnings. When the stock dividend is declared a transfer is made from earned capital to contributed or permanent capital.
Advantages:
Disadvantages:
Traditional theories might have said that distribution of dividend being from after-tax profits, tax considerations do not matter in the hands of the payer-company. However, with the arrival of Corporate Dividend Tax on the scene in India, the position has changed. Since there is a clear levy of such tax with related surcharges, companies have a consequential cash outflow due to their dividend decisions which has to be dealt with as and when the decision is taken.
In the hands of the investors too, the position has changed with total exemption from tax being made available to the receiving-investors. In fact, it can be said that such exemption from tax has made the equity investment and the investment in Mutual Fund Schemes very attractive in the market. Broadly speaking Tax consideration has the following impacts on the dividend decision of a company:
Before introduction of dividend tax:
Earlier, the dividend was taxable in the hands of investor. In this case the shareholders of the company are corporates or individuals who are in higher tax slab, it is preferable to distribute lower dividend or no dividend. Because dividend will be taxable in the hands of the shareholder @ 30% plus surcharges while long-term capital gain is taxable @ 10%. On the other hand, if most of the shareholders are the people who are in no tax zone, then it is preferable to distribute more dividend.
After introduction of dividend tax:
Dividend tax is payable @ 12.5% - surcharge + education cess, which is effectively near to 14% and changed. Now, time to time if the company were to distribute dividend, shareholder will indirectly bear a tax burden of 14% on their income. On the other hand, if the company were to provide return to shareholder in the form of appreciation in market price – by way of Bonus shares – then shareholder will have a reduced tax burden. For securities on which STT is payable, short-term capital gain is taxable @ 10% while long-term capital gain is totally exempt from tax.
Therefore, we can conclude that if the company pays more and more dividend (while it still has reinvestment opportunities) then to get same after-tax return shareholders will expect more before tax return and this will result in lower market price per share.
Solved Case 1
Alfa Ltd. with net operating earnings of ₹ 3,00,000 is attempting to evaluate a number of possible capital structures, given below. Which of the capital structure will you recommend, and why?
| Capital Structure | Debt in capital Structure (₹ ) | Cost of debt (ki) (percent) | Cost of equity (ke) (percent) |
| 1 | 3,00,000 | 10 | 12 |
| 2 | 4,00,000 | 10 | 12.5 |
| 3 | 5,00,000 | 11 | 13.5 |
| 4 | 6,00,000 | 12 | 15 |
| 5 | 7,00,000 | 14 | 18 |
Solution:
Solved Case 2
From the following selected operating data, determine the degree of operating leverage. Which company has the greater amount of business risk? Why?
| A Ltd (₹ ) | B Ltd (₹ ) | |
| Sales | 25,00,000 | 30,00,000 |
| Fixed costs | 7,50,000 | 15,00,000 |
Variable expenses as a percentage of sales are 50% for firm A and 25% for firm B.
Solution:
Solved Case 3
The operating income of Hypothetical Ltd amounts to ₹ 1,86,000. It pays 35% tax on its income. Its capital structure consists of the following:
| 14% Debentures | 5,00,000 |
| 15% Prefernce shares | 1,00,000 |
| Equity Shares (₹ 100 each) | 4,00,000 |
Solution:
Solved Case 4
The shareholders’ funds of XYZ Ltd for the year ending March 31 are as follows: (₹)
| 12% prefernce share capital | 1,00,000 |
| Equity share capital (Rs 100 each ) | 4,00,000 |
| Share premium | 40,000 |
| Retained earnings | 3,00,000 |
| 8,40,000 |
The earnings available for equity shareholders from this period’s operations are ₹ 1,50,000, which have been included as part of the ₹ 3,00,000 retained earnings.
Solution:
A. Theoritical Questions
1. In order to calculate EPS, Profit after Tax and Preference Dividend is divided by:
Answer: b. Number of Equity Shares
2. Trading on Equity is:
Answer: b. May be beneficial
3. Benefit of ‘Trading on Equity’ is available only if:
Answer: a. Rate of Interest > Rate of Return
4. According to Gordon’s Dividend Capitalisation Model, if the share price of a firm is ₹ 43, its dividend pay- out ratio is 60%, cost of equity is 9%, ROI is 12% and the number of shares are 12,000, what will be the net profit of the firm?
Answer: c. ₹ 36,120
B. Numerical Question
1. GC Ltd. follows a current dividend policy of distributing 40% of its earnings. The shares of the company trade at ₹ The management is of the opinion that an increase in the dividend payout from current 40% to either 50% or 60% would increase the value of the firm and provide better returns to the investors.
Assuming that the firm continues to remain in the same business and expected earnings of ₹ 40 per share in the coming year, examine the shareholders’ return if GC Ltd. changes its payout to (a) 50%, and (60%).
Solution:
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"Koncept perfectly justifies what it sounds, i.e, your concepts are meant to be cleared if you are a Konceptian. My experience with Koncept was amazing. The most striking experience that I went through was the the way Yash sir and Ruchika ma'am taught us in the lectures, making it very interesting and lucid. Another great feature of Koncept is that you get mentor calls which I think drives you to stay motivated and be disciplined. And of course it goes without saying that Yash sir has always been like a friend to me, giving me genuine guidance whenever I was in need. So once again I want to thank Koncept Education for all their efforts."
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"Hi. My name is Arka Das. I have cleared my CMA Foundation Exam. I cleared my 12th Board Exam from Bengali Medium and I had a very big language problem. Koncept Education has helped me a lot to overcome my language barrier. Their live sessions are really helpful. They have cleared my basic concepts. I think its a phenomenal app."
"I cleared my foundation examination in very first attempt with good marks in practical subject as well as theoretical subject this can be possible only because of koncept Education and the guidance that Yash sir has provide me, Thank you."
