Page 317 - DMGT405_FINANCIAL%20MANAGEMENT

Unit 14: Management of Surplus & Dividend Policy

14.8 Review Questions Notes

1. What do you think are the determinants of the dividend policy of corporate enterprise?
2. Explain the terms bonus shares and share splits. What is their rationale?
3. What factors determine the dividend policy of a company? Do you believe it will be
justifiable for a company to obtain a short-term loan from a bank to allow payment of a
dividend?
4. To what extent are firms able to establish definite long run dividend policies? What
factors would affect these policies? To what extent might these policies affect market value
of firms’ securities? Explain.
5. What is stable dividend policy? Why should a firm follow such a policy?
6. In a world of no taxes and no transaction costs, a firm cannot be made more valuable by
manipulating the dividend payout ratio. Explain the validity of the statement.
7. What assumptions and arguments are used by Modigliani and Miller in support of the
irrelevance of dividends? Are dividends really irrelevant? If not, what are the arguments
for relevance of dividend policy?
8. (a) Explain the following formula given by Walter for determining dividend policy:

D R /R (E D)

a
c
V =
R c
where, V = value of ordinary shares
R = Internal productivity of retained earnings
a
R = Market capitalization rate
c
E = Earnings per shares
D = Dividends per share
(b) What are the merits and limitations of the formula in designing the dividend policy
for a company?
9. How far do you agree with the proposition that dividends are irrelevant?
10. ‘Payment of dividend involves legal considerations’. Discuss.
Answers: Self Assessment
1. Surplus 2. good 3. Earnings
4. fixed rupee 5. stable dividend payout 6. normal
7. relevant. 8. intrinsic 9. rational expectation
10. outstanding 11. bonus 12. stock option
13. company 14. maximization of wealth 15. 30

14.9 Further Readings

Books Dr Pradeep Kumar Sinha, Financial Management, New Delhi, Excel Books, 2009.
Van Horne, J.C. and Wachowicz, Jr, J.M., Fundamentals of Financial Management,
New Delhi, Prentice Hall of India Pvt. Ltd., 1996, p. 2.
Chandra, P., Financial Management—Theory and Practice, New Delhi, Tata McGraw
Hill Publishing Company Ltd., 2002, p. 3.

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