Page 219 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes 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. It is known as stock dividend in USA to the
existing shareholder. Bonus shares are shares issued to the existing shareholders as a
result of capitalisation of resources. The declaration of bonus shares will increase the paid
up share capital and reduces retention of earnings. But there would not be any change in
net worth. Issue of bonus shares increases the number of outstanding shares. Distribution
of bonus shares is done proportionately. Payment of dividend in the form of bonus share
does not affect the wealth of owners', since earnings per share and market price per share
will fall proportionately. When there is no wealth maximisation why do firms pay dividend
in the form of bonus shares?

Self Assessment

Fill in the blanks:
15. Making share trading attractive is one of the reasons of ………………… .
16. Dividend warrants must be posted within ………………… days.

17. ………………… is the payment of additional shares of common stock to ordinary
shareholders.
18. ………………… promises to pay the shareholders at a future date.

19. Usual forms of paying dividend is………………… .
20. The issue of bonus shares amounts to a corresponding increase in the ………………… of a
firm.

9.6 Mathematical Approaches for Dividend Decisions

A few models, which studied the relationship between the dividend policy and the equity
returns, are given below:

Walter's Model

Walter's Model supports the doctrine that dividends are relevant. The investment policy of a
firm cannot be separated from its dividend policy and both are, according to Walter, interlinked.
The choice of an appropriate dividend policy affects the value of an enterprise.

The relationship between dividend and share price on the basis of Walter's formula is shown
below:
D +R /R (E–D)
a
c
V =
c
R c
Where,
V = Market value of the ordinary shares of the company
c
R = Actual capitalization rate
a
R = Normal capitalization rate expected by the investors
c

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