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Unit 9: Dividend Decisions

"India churns out 3,50,000 engineers per annum while the US graduates 70,000 engineers. Notes
Germany graduates more architects than engineers. Engineering is not getting the desired
attention in Western nations, and in three years, it will lead to a shortage of technical
talent. It costs $7,500 for an engineer in India while the same is $55,000 in the US. Even with
a 12 per cent salary hike in India, the cost per person will continue to be less here. India
will continue to reign in terms of competitiveness", he argued.
Wipro BPO: "In addition to voice, we are driving the transaction processing business. It is
14-15 per cent of the total sales but in two years we hope to increase it to 40 per cent as it
has a larger market share possibility," Mr Premji said. Wipro BPO currently has 14,000
employees.
Source: http://www.thehindubusinessline.in/2005/11/28/stories/2005112802050200.htm

9.7 Summary

 Profit is the primary motivating force for any economic activity, business enterprise,
essentially being an economic organization has to maximize the welfare of its stakeholders.
To this end, the business undertaking has to earn profit from its operations.

 Profit is the excess of revenues from operations over expenses on conducting such
operations over expenses on conducting such operations.
 Profit growth coupled with high level of profit and the ability to maintain reasonable
profit will help towards ensuring that shareholders receive an adequate dividend;
preserving the assets worth of the business; generating a sufficient cash flow out of profits
to provide capital for expansion; and providing funds for the research and development of
new and improved products to replace existing products before they go into decline.
 From the point of view of dividend decision it is better to call management of profit as
management of earnings. Earnings mean net earnings available to equity shareholders
from where a firm actually declares dividends or retain profits for financing of investment
opportunities.
Net earnings = operating profit – (Interest + tax + preference dividend)
 Management of earnings means how the earnings of a firm are be determined and how
they are utilized or appropriated or allocated or distributed. Management of earnings
policy must maximize value of the firm, there by maximize benefits to its owners.
 The term 'dividend' refers to that portion of company's net earnings that is paid out to the
equity shareholders (not for preference shareholders, since they are entitled to have a
fixed rate of dividend).
 Dividend policy of a firm 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. The alternative use of net earnings or net profit dividends and retained earnings
are competitive and conflicting, since it affects the value of the firm.
 There are different types of dividend policies: stable dividend policy, here "stability"
refers to the consistency or lack of variability in the stream of dividend payments. In more
precise terms, stable dividend means payment of a certain minimum amount of dividend
regularly. There are three distinct forms of stability; they are (a) Constant dividend per
share, (b) Constant payout ratio, and (c) Stable rupee dividend plus extra dividend.

 As there is a positive relation between dividend policy of a firm and the value of that firm.
The dividend payout ratio of a firm should be determined with reference to two objectives-

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