Page 211 - DMGT409Basic Financial Management

Basic Financial Management

Notes

Task A textile company belongs to a risk-class for which the appropriate PE ratio is 10. It
currently has 50,000 outstanding shares selling at `100 each. The firm is contemplating the

declaration of `8 dividend at the end of the current fiscal year which has just started.

Given the assumption of MM, answer the following questions:
1. What will be the price of the share at the end of the year: (a) if a dividend is not
declared, (b) if its is declared?

2. Assuming that the firm pays the dividend and has a net income of `5,00,000 and
makes new investments of `10,00,000 during the period, how many new shares must
be issued?

3. What would be the current value of the firm: (a) if a dividend is declared, (b) if a
dividend is not declared?
13.2 Forms of Dividend

Dividend is the portion of earnings available to equity shareholders that equally (per share bias)
is distributed among the shareholders. The following discussion deals with the different forms
of dividends.
1. Cash Dividend: Generally many companies pay dividends in the form of cash. But payment
of dividend in the form of cash requires enough cash in the bank or in hands. In other
words, there should not be any shortage of cash for payment of dividends. Suffi cient cash
is available only when a company prepares cash budget to estimate the required amount
for the period for which the budget is prepared. If the company finds any shortage of cash,

it should make arrangements to borrow funds. But it may be difficult to prepare a cash
budget with the expected amount needed for payment of dividends.
2. Scrip Dividend: In this form of dividends, the equity shareholders are issued transferable
promissory notes for a shorter maturity period that may or may not be interest bearing. It
is a simple payment of dividends in the form of promissory notes. Payment of dividend
in this form takes place only when the firm is suffering from shortage of cash or weak

liquidity position. Payment of dividends in the form of cash is justifiable only when the

company has earned profits and it will take some time to convert current assets into cash.

3. Bond Dividend: Both scrip dividend and bond dividend are same, but they differ in terms
of maturity. Bond dividends caries longer maturity whereas, scrip dividend carries shorter
maturity. The effect of both forms of dividends on the company is the same. Bond dividend
bears interest.
4. Property Dividend: The name itself suggests that payment of dividend takes place in the
form of property. In other words, payment of dividends in the form of assets. This form
of dividends takes place only when a firm has assets that are no longer necessary in the

operation of business and shareholders are ready to accept dividend in the form of assets.
This form of dividend payment is not popular in India.
5. Stock Dividend (Bonus Shares): Stock dividend is the payment of additional shares of
common stocks to the ordinary shareholders. In other words, distribution of bonus shares
to the stockholders instead of cash dividend.

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