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114 Financial Management C. If payout ratio is 75% D = 75% of 10 = 7.50 (i) r = 12% = 0.12, D = 75% of 10 = 7.50 − P= = + = (ii) r = 8% = 0.8, D = 75% of 10 = 7.50 P= = − + = = (iii) r = 4% = 0.04, D = 75% of 10 = 7.50 P= = − + = = = × − = = If the payout is 20% the value of b=0.60 and the price of the share is = = = = Rs. 120
Dividend Decision 115 Criticism of Gordon’s Model Gordon’s model consists of the following important criticisms: Gordon model assumes that there is no debt and equity finance used by the firm. It is not applicable to present day business. K e and r cannot be constant in the real practice. According to Gordon’s model, there are no tax paid by the firm. It is not practically applicable. FACTORS DETERMINING DIVIDEND POLICY Profitable Position of the Firm Dividend decision depends on the profitable position of the business concern. When the firm earns more profit, they can distribute more dividends to the shareholders. Uncertainty of Future Income Future income is a very important factor, which affects the dividend policy. When the shareholder needs regular income, the firm should maintain regular dividend policy. Legal Constrains The Companies Act 1956 has put several restrictions regarding payments and declaration of dividends. Similarly, Income Tax Act, 1961 also lays down certain restrictions on payment of dividends. Liquidity Position Liquidity position of the firms leads to easy payments of dividend. If the firms have high liquidity, the firms can provide cash dividend otherwise, they have to pay stock dividend. Sources of Finance If the firm has finance sources, it will be easy to mobilise large finance. The firm shall not go for retained earnings. Growth Rate of the Firm High growth rate implies that the firm can distribute more dividend to its shareholders. Tax Policy Tax policy of the government also affects the dividend policy of the firm. When the government gives tax incentives, the company pays more dividend. Capital Market Conditions Due to the capital market conditions, dividend policy may be affected. If the capital market is prefect, it leads to improve the higher dividend.
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Preface Financial Management is an
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Contents • Increase the value of
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Contents • Effects of under capit
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Contents Modigliani and Miller’s
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Contents • Average stock level 16
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Contents • Operational result of
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Contents Insurance Sector in India
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2 Financial Management According to
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4 Financial Management SCOPE OF FIN
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6 Financial Management 3. Profit is
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8 Financial Management Traditional
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10 Financial Management Proper Use
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12 Financial Management Financial S
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14 Financial Management the operati
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16 Financial Management Solution Co
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18 Financial Management Exercise 3
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20 Financial Management Solution Sc
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22 Financial Management Solvency Ra
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24 Financial Management Debtors Tur
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26 Financial Management SOURCES OF
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28 Financial Management SECURITY FI
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30 Financial Management profit, the
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32 Financial Management 2. Cumulati
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34 Financial Management Features of
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36 Financial Management financial y
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38 Financial Management Short-term
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48 Financial Management According t
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50 Financial Management FACTORS DET
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52 Financial Management -up to Rs.
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62 Financial Management Exercise 9
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166 Financial Management A proper p
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170 Financial Management Ordering c
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(A) First in First out Method FIFO
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176 Financial Management 3. Specula
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178 Financial Management Opportunit
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180 Financial Management 1. Sales L
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182 Financial Management Percentage
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184 Financial Management Solution S
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188 Financial Management (iv) (v) H
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190 Financial Management (c) Work-i
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198 Financial Management 13. On 1 A
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200 Financial Management According
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202 Financial Management 7. Domesti
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204 Financial Management • Unit T
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206 Financial Management 11. IDBI J
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208 Financial Management In 1998 a
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212 Financial Management 4. FDI in
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214 Financial Management (b) SEBI s
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230 Financial Management • Global
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238 Financial Management Functions
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