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Dividend policy as a strategic tool
Dividend policy & firm performance
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CHAPTER ONE
INTRODUCTION
1.0 INTRODUCTION
Dividend can be defined as a portion of company profit that is paid out by the corporation to their shareholders as a reward for investing in the corporation meanwhile dividend policy refers to a company’s policy which determines the amount of dividend payments and the amounts of retained earnings for reinvesting in new projects. This policy is related to dividing the firm’s earning between payment to shareholders and reinvestment in new opportunities and helps the firms to know that how they can control the agency costs by handling the Dividend policy.
Dividend policy is a very important one in the current business environment. According to Nissim & Ziv (2001), dividend policy is the regulations and guidelines that a company uses to decide to make dividend payments to the shareholders. Dividend policy is the one of the most important financial policies not only from the point of view of the company, but also from the points of view to the shareholders, the consumers, employees, regulatory bodies and the Government.
Dividend will be benefits of shareholders in return for their risk and investment where it’s determined by a different factor in organization like financing limitation, investment chances and choice, regulatory regime firm size and pressure from shareholders. However, the dividend payout of firm’s is not only the source of cash flow to the shareholders but it also offers information relating to the firm’s current and future performance.
Firm performance in this case can be viewed as how well a firm enhances its shareholders’ wealth and the capability of a firm to generate earnings from the capital invested by shareholders. Dividend policy can affect the value of the fir...
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...nd payout, revenue and total
Assets on net profit.
H1 :There is significant impact of dividend payout, revenue and total assets on net profit
3.5 STATISTICAL SOFTWARE
STATA are use in this research study which are complete, integrated statistical software package that provides everything needed for data analysis, data management and graphics. It has broad suite of statistical features, putting hundreds of statistical tools from advanced techniques like dynamic panel data (DPD) regressions and generalized estimating equations (GEE), to standards methods such as generalized linear models (GLM) and ANOVA. STATA also makes it easy to produce publication-quality and distinctly-styled graphs like regression fit graphs and distributional plots. With point-and-click interface and intuitive command syntax, STATA is fast and generates accurate results.
The first financial ratio of the analysis is the Price to Earnings ratio (“P/E ratio”). The ratio is computed by dividing the price of one share of common stock, by the earnings per share of common stock. This analysis uses diluted earnings per share which assumes the issuance of new stock for all existing stock options. Also, the price of the stock was computed as an average of the fourth quarter high and low stock prices published in the 10K report of each company, because the year end stock prices were not listed for all the companies. Because the P/E ratio measures the relative costliness of different stocks, in relation to their income, it provides a useful place to begin the analysis.
In Be Our Guest, Inc.’s scenario, we can see that the total cash flow from operations increased from 1995, $168,000, to 1997, $229,000, by 37%. This increase to the CFO is a result of a few different accounts. Although net income decreased 22.8% from 1995 to 1997, because depreciation increased 25.8% from 1995 to 1997, the total net income adjusted for non-cash charges increased by 4% from $250,000 to $259,000, from 1995 to 1997. The changes to Accounts Receivable over the years reduce cash flow from operations by $75,000, $46, $42,633 in 1995, 1996, and 1997, respectively. These increases in accounts receivable cause the cash flow from operations to decrease because Be Our Guest, Inc. collected less money from their customers compared to the sales. Whereas, the changes in Accounts payable & accruals of, $5,768, $19,063, and $14,859, in 1995, 1996, and 1997, respectively, caused the cash flow from operations to increase because Be Our Guest, Inc. is paying their suppliers less, indicating they are retaining more cash for
We defined several criteria to determine our choice – return, risks and other quantitative and qualitative factors. Targeting a debt ratio of 40% will maximize the firm’s value. A higher earning’s per share and dividends per share will lead to a higher stock price in the future. Due to leveraging, return on equity is higher because debt is the major source of financing capital expenditures. To maintain the 40% debt ratio, no equity issues will be declared until 1985. DuPont will be financing the needed funds by debt. For 1986 onwards, minimum equity funds will be issued. It will be timed to take advantage of favorable market condition. The rest of the financing required will be acquired by issuing debt.
Making an analysis of the profitability of the shareholder can be seen that although both companies have similar returns, the source of this return is different.
To collect relevant data, the annual percentage change in net income per common share diluted, net income/net revenues, the major income statement accounts to net revenues, return on stockholders’ equity, the price/earnings (P/E) ratio, and the book values per share for each year numbers were examined. In order for Sun Microsystems to see a greater return in its bottom line assets, it must consider an alternative approach in operating its organization.
A business might generate sufficient cash inflows if it is profitable. The directors of the company need to make a decision regarding paying dividends. The payout ratio along with the amount that needs to be paid must be specific if the management of the organization decides for paying dividends. Management of the company are directed by the principle of wealth maximization of shareholders When it comes to deciding whether to pay dividend or not, the organization might not pay dividends, if the profit can be capitalized somewhere else for generating future cash flows (Kaplan Financial,
In mid September 2005, Ashley Swenson, the chief financial officer of this large CAD/CAM equipment manufacturer must decide whether to pay out dividends to the firm¡¦s shareholders or repurchase stock. If Swenson chooses to pay out dividends, she must also decide on the magnitude of the payout. A subsidiary question is whether the firm should embark on a campaign of corporate-image advertising and change its corporate name to reflect its new outlook. The case serves a review of the many practical aspects of the dividend and share buyback decisions, including(1) signaling effects, (2) clientele effects, and (3) finance and investment implications of increasing dividend payout and share repurchase decisions.
The ratios returns on investment (ROI) and return on equity (ROE) are two of the most popular measure of profitability of a company and, along with the P/E ratio, have the most significant value of any of the ratios. The DuPont Model expands on the ROI calculation by inserting sales and it's relationship to the companies' generation of profits and utilization of assets into the calculation. Additional profitability ratios include the price earnings ratio (P/E), the dividend payout and the dividend yield. The price earnings ratio helps to indicate to investor how expensive the shares of common stock of a firm are. Dividend yield is part of the stockholders ROI and is represented by the annual cash dividend. Dividend yields have historically been between 3% to 6% for common stock and 5% to 8% for preferred stock. Dividend payout ratio shows the proportion of the earnings paid to common shareholders. Dividend payout for manufacturing companies range from 30% to 50%, but can vary widely.
Introduction Dividends are the distribution of profits in the company. It depends on the type of dividend policy that is being made by companies. Dividend policy will affect the behaviours and attitudes of investors towards the company. Many economists and financial experts have constructed different theories to interpret the effects of a dividend policy on the society. But these theories are contestable since they are not tested in the real world.
The rapid development of media and technology in the world market today has helped companies to sell their products and get in touch with their customers more easily (Rayburn, 2012). However the success of a company depends on many factors, not that only whether it has brilliant advertisement or marketing campaigns. The main aim of a company is to create shareholder’s value which according to Bender and Ward (2008), companies have to manage both well in a trading environment and financial environment in order to do that. Hence, the financial strategy can be seen as one of the most important factors in contributing to the business’s success especially to a large company such as Unilever as it is all about strategic decisions related to raising and manage the funds in the most appropriate manner.
The companies I have selected for this assignment is Malaysia Steel Works (KL) Bhd (5098) and Kossan Rubber Industries Bhd. (7153), both of the company is from industrial products sector and its share is traded in main market.
Most of preference share issued by company are cumulative preference share, which means that all the arrear of dividend must be paid to preference share holder before paying any dividend to equity shareholders. This is company liabilities to pay arrear of dividend which increase financial burden of company.
The company must have a clear statement of its policy for remunerating directors whether executive or non executive directors. This will make the work of remuneration committee very easy. The remuneration policy should be properly disclosed before the shareholders in the AGM for their approval.
In the past, the company performance was measured by asking ‘how much money the company makes?’ To a certain extent, they are right because gross revenue, profitability, return on capital, etc. are the results that companies must bring to survive. Unfortunately, in today business if the management focuses only on the financial health of the company, numerous unwanted consequences may arise.
Lintner (1956) in his study argued in favor of relevancy of dividend policy as the dividend are the relevant factors to determine the value of the firm. Gordon(1962) use dividends as the method of valuation for corporation which put an emphasis on the importance of dividend while doing valuation of corporation. For behavioral