Page 316 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes could net $20 per share to RKP. Chowdhary Prasad called new Jersy and confirmed that
these options were still open to the firm.
In making decision on new investments, Chowdhary Prasad believes in the validity of the
future-earnings per share technique. He knows that RKP has traditionally traded at a 6/1
price-earning multiple and he expects that this will hold. Thus, if a new project increases
future earnings per share, it will increase the value of the firm for its shareholders.
Question
According to the future earning share approach and after detailed analysis what do you
feel about the plastic project. Is it worth while to accept.

14.6 Summary

 Management of earnings means, how the earnings of a firm are determined and how they
are utilised or appropriated or allocated or distributed.
 The firm’s dividend policy is formulated with two basic objectives in mind – providing
for sufficient financing and maximizing the wealth of the firm’s shareholders.

 Three of the more commonly used dividend policies are Constant Payout Ratio Dividend
Policy, Regular Dividend Policy and; Low Regular and Extra-dividend Policy
 According to traditional approach of dividend policy the stock value responds positively
to higher dividends and negatively with low dividends.
 According to Walter model, the investment policy of a firm cannot be separated from its
dividend policy and both are interlinked.
 Gordon Model assumes that future dividends are the sole determinant of the intrinsic
value of the common shares.

 The irrelevance of dividends is provided by the Miller and Modigliani Hypothesis
 According to rational expectation model, there would be no impact of the dividend
declaration on the market price of the share so long as it is at the expected rate.

 In addition to cash dividends, the firm has other options for distributing profits to
shareholders. These options are Bonus shares (stock dividend), Stock (share) split and
Stock repurchase
 The amount of dividend that can be legally distributed is governed by the company law,
judicial pronouncements in leading cases and contractual restrictions.

14.7 Keywords

Dividends: It refers to that portion of company’s net earnings that is paid out to the equity
shareholders.
Dividend Policy: It decides the portion of earnings to be paid as dividends to ordinary
shareholders and what portion is ploughed back in the firm for investment purpose.
Payout Ratio: The ratio of dividend to earnings is known as payout ratio.
Profit: It is the excess of the revenue over the expenses on conducting the operations.

Stability: it refers to the consistency or lack of variability in the stream of dividend payments.

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