Page 213 - DMGT409Basic Financial Management

Basic Financial Management

Notes 13.3 Summary

Payment of dividend through issue of bonus share is a financial gimmick, since it will not

affect the owners’ wealth. The reasons for payment of dividend in the form of stock are
to: bring the market price per share within a more popular range, promotes more active
trading, reduce the nominal rate of dividend, increase paid up share capital, indicate the

prospects of the firm, improve prospects of raising additional funds.
Stock dividend is advantages for company and the owners. Advantages enjoyed by the
issuing company are: Maintenance of liquidity portion, manage fi nancial diffi culties,
attractive share price, enhances prestige, widening the share for market, availability of

funds for expansion programme. Stock dividend is also beneficial to owners by tax savings,
indication of future benefits, psychological value.

Apart from the advantages stock dividend has the following disadvantages. Costly, reduces
EPS and price earnings ratio, prevents new investor from becoming the shareholders of the
firm, misuse of management power, since there is no dilution of control it is disadvantageous

to the company. Disappointment of shareholders, shareholders wealth remains unaffected,
lowers the market value of existing shares, less security to investors, done to reduction in
reserves are the few disadvantages to owners.

13.4 Keywords

Infl ation: It is the state of the economy in which the prices of the products have been increasing.
Scrip Dividend: It is the dividend payment method in the form of promissory note.

Stock Dividend: It is the payment of the additional shares of common stocks to the ordinary
shareholders.

13.5 Self Assessment

Fill in the blanks:
1. Prof. James E Walter argues that the choice of ................................. almost always affects the
value of the fi rm.
2. The firms having R>K may be referred to as ..................................

3. According to MM, the dividend policy of a firm is ............................

4. ............................. carries longer maturity whereas, scrip dividend carries shorter maturity.
5. ............................. is the payment of additional shares of common stocks to the ordinary
shareholders.
6. Usual forms of paying dividend is ..........................

7. The issue of bonus shares amounts to a corresponding increase in the ................................. of
a fi rm.
State whether the following statement are true or false:

8. Stock dividend affects the liquidity position of the fi rm.
9. Management of earnings has nothing to do with retention of profi ts.
10. Ploughing back of profits is the same as self-fi nancing.

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