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FINANCIAL MANAGEMENTA Report on Dividend Decision

SUBMITTED TO : Miss Pragya Bhargava(Asst. Prof. of SchoolOf Commerce and MGMT)

SUBMITTED BY:Barkha Daswani (K13517)Surbhi Hada (K13239)Ravi Singh (K13389)Ashim Roy (K13226)Varsha Singh (K13560)

What is Dividend?A dividend is a distribution to shareholders out of profit or reserve available for this purpose.- Institute of Chartered Accountants of India

Forms/Types of DividendOn the basis of Types of Share:

Equity DividendPreference Dividend

On the basis of Mode of Payment:

Cash DividendStock DividendBond DividendProperty DividendComposite Dividend

Contd.

On the basis of Time of Payment:

Interim DividendRegular DividendSpecial Dividend

Dividend DecisionThe term dividend refers to that part to that part pf profits of a company which is distributed by the company among its shareholders.

It is the reward of the shareholders for investments made by them in the shares of the company.

Dividend Policies involve the decisions, whether-

To retain earnings for capital investment and other purposes; orTo distribute earnings in the form of dividend among shareholders; orTo retain some earning and to distribute remaining earnings to shareholders.

Factors influencing the dividend decisionStability of earnings Financing policy of the firm Liquidity of funds Dividend policy of competitive firmsPast dividend rates Debt obligation Ability to borrowGrowth needs of the company Profit rates Legal requirements Policy of controlCorporate taxation policy Tax position of shareholders Effect of trade policyAttitude of the investor group

What is Dividend Policy : Dividend policy determines the division of earnings between payments to shareholders and retained earnings.

- Weston and Bringham

Classification of Dividend PolicyDividend may be classified according to:

Sources from which they are derived: e.g.:

(i) Retained Earnings; or (ii) Current Profit;

(b) Medium in which they are distributed; e.g:

(i) Cash Dividend; or (ii) Share Dividend (i.e Bonus Shares);

(c) The regularity with which they are paid; e.g.:

(i) Interim Dividend; or (ii) Annual Dividend.

DIVIDEND THEORIES

Relevance Theories

Prof. James E Walter argued that in the long-run the share prices reflect only the present value of expected dividends. Retentions influence stock price only through their effect on future dividends. Walter has formulated this and used the dividend to optimize the wealth of the equity shareholders.Walters Model

Formula of Walters ModelWhere,P = Current Market Price of equity shareE= Earning per shareD = Dividend per share(E-D)= Retained earning per share r = Rate of Return on firms investment or Internal Rate of Return k = Cost of Equity CapitalP D + r (E-D) k k=

Growth Firm (r > k):r = 20%k = 15%E = Rs. 4If D = Rs. 4P = 4+(0) 0.20 /0 .15= Rs. 26.67 0.15If D = Rs. 2P = 2+(2) 0.20 / 0.15= Rs. 31.11 0.15Illustration:

Normal Firm (r = k):r = 15%k = 15%E = Rs. 4If D = Rs. 4P = 4+(0) 0.15 / 0.15= Rs. 26.67 0.15If D = Rs. 2P = 2+(2) 0.15 / 0.15= Rs. 26.67 0.15Illustration:

Declining Firm (r < k):r = 10%k = 15%E = Rs. 4If D = Rs. 4P = 4+(0) 0.10 / 0.15= Rs. 26.67 0.15If D = Rs. 2P = 2+(2) 0.10 / 0.15= Rs. 22.22 0.15Illustration :

Assumptions of Walters Model:

Internal Financingconstant Return in Cost of Capital100% payout or RetentionConstant EPS and DPSInfinite time

Criticisms of Walters ModelNo External FinancingFirms internal rate of return does not always remain constant. In fact, r decreases as more and more investment in made.Firms cost of capital does not always remain constant. In fact, k changes directly with the firms risk.

Gordons ModelIt is similar to Walters Model.

As per Gordon, the dividend policy has a direct impact on the value of shares of the firm.

The basics difference between Walters and Gordons model is that in Gordons model the market value of shares is equal to the present value of dividends.

Formula of Gordons ModelWhere,P = PriceE = Earning per Shareb = Retention Ratiok = Cost of Capitalbr = g = Growth RateP = E (1 b) K - br

Growth Firm (r > k):r = 20%k = 15%E = Rs. 4If b = 0.25P0 = (0.75) 4= Rs. 30 0.15- (0.25)(0.20)If b = 0.50P0 = (0.50) 4= Rs. 40 0.15- (0.5)(0.20)Illustration :

Normal Firm (r = k):r = 15%k = 15%E = Rs. 4If b = 0.25P0 = (0.75) 4= Rs. 26.67 0.15- (0.25)(0.15)If b = 0.50P0 = (0.50) 4= Rs. 26.67 0.15- (0.5)(0.15)Illustration :

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Declining Firm (r < k):r = 10%k = 15%E = Rs. 4If b = 0.25P0 = (0.75) 4= Rs. 24 0.15- (0.25)(0.10)If b = 0.50 P0 = (0.50) 4= Rs. 20 0.15- (0.5)(0.10)Illustration :

Assumptions:All equity firmNo external FinancingConstant ReturnsConstant Cost of CapitalPerpetual EarningsNo taxesConstant RetentionCost of Capital is greater then growth rate (k>br=g)

Criticisms of Gordons modelAs the assumptions of Walters Model and Gordons Model are same so the Gordons model suffers from the same limitations as the Walters Model.

Irrelevance Theories

Modigliani & Millers Irrelevance ModelDepends onDepends on

Modigliani and Millers ApproachAssumptionCapital Markets are Perfect and people are RationalNo taxesFloating Costs are nilInvestment opportunities and future profits of firms are known with certainty (This assumption was dropped later)Investment and Dividend Decisions are independent

Formula of M-Ms ApproachPo = 1 ( D1+P1 ) (1 + p) Where,Po = Market price per share at time 0,D1 = Dividend per share at time 1,P1 = Market price of share at time 1

M-Ms ArgumentIf a company retains earnings instead of giving it out as dividends, the shareholder enjoy capital appreciation equal to the amount of earnings retained.If it distributes earnings by the way of dividends instead of retaining it, shareholder enjoys dividends equal in value to the amount by which his capital would have appreciated had the company chosen to retain its earning.

Hence,the division of earnings between dividends and retained earnings is IRRELEVANT from the point of view of shareholders.

Criticism of M-M ModelNo perfect Capital MarketExistence of Transaction CostExistence of Floatation CostLack of Relevant InformationDifferential rates of TaxesNo fixed investment PolicyInvestors desire to obtain current income

Traditional ApproachThis theory regards dividend decision merely as a part of financing decision becauseThe earnings available may be retained in the business for re-investment Or if the funds are not required in the business they may be distributed as dividends.Thus the decision to pay the dividends or retain the earnings may be taken as a residual decision.This theory assumes that the investors do not differentiate between dividends and retentions by the firmThus, a firm should retain the earnings if it has profitable investment opportunities otherwise it should pay than as dividends.

A V Birla GroupTheAditya Birla Groupis anIndianmultinationalconglomeratenamed afterAditya Vikram Birla, headquartered in the Aditya Birla Centre inWorli,Mumbai, India.It operates in 40 countries with more than 120,000 employees worldwide.The group was founded by Seth Shiv Narayan Birla in 1857. The group interests in sectors such as viscose staple fibre, metals, cement (largest in India), viscose filament yarn, branded apparel, carbon black, chemicals, fertilisers, insulators, financial services, telecom (third largest in India), BPO and IT services.The group had revenue of approximately US$41 billion in year 2015.It is the third-largest Indian private sector conglomerate behindTata Groupwith revenue of just over US$100 billion andRILwith revenue of US$74 billion.

Aditya Birla NuvoAditya Birla Nuvo Limited (ABNL), a US$4 billion conglomerate by revenue size, is part of the Aditya Birla Group, a US$41 billion Indian multinational, operating in 36 countries across the globe. With a market cap of ~US$200.11 billion (21 March 2017), Aditya Birla Nuvo is present across Financial Services, Telecom, Fashion and Lifestyle and Manufacturing Businesses.The razor-sharp focus on each business has made the company a leading player in most segments, including viscose filament yarn, apparel brands, agri business, textiles and insulators. Over the last few years, Aditya Birla Nuvo, through its subsidiaries and joint ventures, has created a leadership position in consumer centric businesses such as life insurance, asset management, lending and other financial services and telecom.

Aditya Birla NuvoAs a leading conglomerate in India, Aditya Birla Nuvo ranks as:

The second-largest producer and largest exporter of viscose filament yarn.The largest branded apparel company offering the best apparel brands in India.The largest linen fabric manufacturer in India.Amongst the most energy-efficient fertiliser plants.India's largest and the world's fourth-largest manufacturer of insulators.

Dividend SummaryFor the year ending March 2016, Aditya Birla Nuvo has declared an equity dividend of 50.00% amounting to Rs 5 per share. At the current share price of Rs 1519.65 this result in a dividend yield of 0.33%.The company has a good dividend track report and has consistently declared dividends for the last 5 years.

ConclusionMany investors seek dividend-paying stocks as a means of generating income and growing wealth. As with any investment, it is important to do your homework and find investments that are suitable to your investing style, time horizon, financial situation and financial objectives. A variety of resources and tools are available in print and online to help you make investment decisions. You can consult with qualified financial planners and tax specialists to determine the best course of action for your investment strategy.

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