Financial Management

© Subrata Halder Dividend Policy

☼ NI = Net Income

☼ DPS = Dividend Per Share

☼ EPS = Earning Per Share

☼ PD = Preference Dividend

☼ DDP = Dividend Declared & Paid

☼ D/P Ratio = Dividend Payout Ratio

☼ P = Market Price Per Share

= Face Value Per Share

= Selling Price Per Share

☼ V = Value of the Firm.

☼ NS = No of Shares Outstanding

☼ g = Growth Rate

☼ b = Retention Ratio

☼ r = Returns on Investment (ROI)

= Internal Rate of Return (IRR)

☼ Ke = Cost of Equity

☼ ROA = Return on Assets

☼ TA = Total Assets

= Common Stock +Pref. Stock Value

☼ NS = 𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦

𝐹𝑎𝑐𝑒 𝑉𝑎𝑙𝑢𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

☼ EPS = 𝑁𝐼−𝑃𝐷

𝑁𝑆

☼ DPS = 𝐷𝐷𝑃

𝑁𝑆

= EPS × D/P Ratio

= EPS × (1 – Retention Ratio)

☼ D/P Ratio = 𝐷𝑃𝑆

𝐸𝑃𝑆 × 100

☼ D/P Ratio + Retention Ratio = 1

Or, D/P Ratio = 1 – Retention Ratio

Or, Retention Ratio = 1 – D/P Ratio

☼ R/E Reinvestment = NI – PD – DDP

= (NI – PD) × b

☼ P/E Ratio = 𝑃

𝐸𝑃𝑆

☼ Maximum DPS = 𝑇𝑜𝑡𝑎𝑙 𝐷𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑃𝑟𝑜𝑓𝑖𝑡𝑠

𝑁𝑆

☼ Ke = 1

𝑃\𝐸 𝑅𝑎𝑡𝑖𝑜 × 100

Or, P \E Ratio = 1

𝐾𝑒 × 100

☼ r = 𝑁𝐼

𝑇𝐴 × 100 Or, Use the formula of Walter Model

☼ g = b × r

Optimum Dividend Payout Ratio:

1. When r > Ke, the firm is in growing situation. So, the optimum payout ratio is 0%

2. When r < Ke, the firm is in declining situation. So, the optimum payout ratio is 100%.

3. When r = Ke, the value of the firm isn’t affected whether it pays dividend or not.

Financial Management

© Subrata Halder Dividend Policy

۞ Walter Model:

P = 𝐷+(𝐸−𝐷)

𝑟

𝐾𝑒

𝐾𝑒

۞ Gordon Model :

P = (1−𝑏)

𝐾𝑒−𝑏𝑟

P = Market Price Per Share

D = Dividend Paid Per Share

E = Earning Per Share

r = ROI or IRR

Ke = Equity Capitalization Rate

b = Retention Ratio

E(1-b) = D

MM Model:

1. P1 = P0 (1 +Ke) – D1

2. P0 = 𝑃1+𝐷1

1+𝐾𝑒

= 𝑉

𝑛

3. n = 𝐼 −(𝐸−𝑛×𝐷1)

𝑃1

4. External Financing = I – (E – n×D1)

5. V = nP0 = (𝑛 + ∆𝑛)𝑝1− 𝐼 + 𝐸

1 + 𝐾𝑒

6. Capital Gain = P1 – P0

Note : When dividend is not paid, D1 = 0.

P0 =Market price per share at the beginning of the year

P1 = Market price per share at the end of the year

n = No of shares

n = No of new shares

D1 = Dividend paid per share

E = Earnings available or Net Income

I = Investment Required

Ke = Cost of equity

= Equity capitalization rate

= Discount rate

V = Value of the firm

☼ D = E × D/P Ratio

= E × (1 – Retention Ratio)

☼ Ke = 1

𝑃\𝐸 𝑅𝑎𝑡𝑖𝑜 × 100

☼ r = 𝐸𝑃𝑆

𝑃

Stock Dividend:

W-1: No of additional shares = No of common stock × Percentage of stock dividend

W-2: R/E transfer = No of additional shares × Market price per share

∴ New retained earning = Existing R/E – R/E transfer

W-3: Additional paid up capital increase:

= No of additional shares × (Market price per share – Common stock price per share)

∴ New additional paid up capital = Existing + Increase.

W-4: New Common Stock Value = (Existing stock unit + Additional) × Common stock per unit

Stock Split : X to Y

☼ No of shares = No of shares outstanding × 𝑋

𝑌

☼ Price per share = Current price × 𝑌

𝑋