Page 238 - Corporate Finance PDF Final new link

NPP

238 Corporate Finance BRILLIANT’S

company may hold shares of other companies H$ånZr Ho$ nmg AÝ` H$ån{Z`m| Ho$ ^r eo`g© hmoVo h¢,O¡go
e.g. shares of subsidiary which may be used gpãg{S>`ar Ho$ eo`g© {OZH$m Cn`moJ {S>{dS>oÝS> Ho$ {dVaU
in distributing dividend. _| {H$`m Om gH$Vm h¡Ÿ&

Dividend Policy {S>{dS>oÝS> nm°{cgr

The objective of company's management is H$ånZr Ho$ _¡ZoO_|Q> H$m CÔoí` CgH$s _mH}$Q> d¡ë`y
to maximize the market value of the enterprise.
H$mo CÀMV_ H$aZm h¡Ÿ& _mH}$Q> d¡ë`y {S>{dS>oÝS> nm°{cgr go
The market value is influenced by the dividend
policy. The dividend policy should be such that à^m{dV hmoVr h¡Ÿ& {S>{dS>ooÝS> nm°{cgr Eogr hmoZr Mm{hE {H$
it satisfies the interest of existing shareholders dh dV©_mZ eo`ahmoëS>g© Ho$ {hVm| H$mo g§Vwï> H$ao Ed§
as well as attract the potential shareholders. In nmoQ>opÝe`c eo`ahmoëS>g© H$mo AmH${f©V H$aoŸ& g§jon _|, eo`g©
brief, the aim should be to maximize the present
H$s _mH}$Q> àmBO Ed§ â`yMa {S>{dS>oÝS> H$s àoOoÝQ> d¡ë`y H$mo
value of future dividend as well as appreciation
in the market price of shares. _¡pŠO_mBO H$aZo H$m CÔoí` hmoZm Mm{hEŸ&
The disposal of earning among share- eo`a hmoëS>g© Ho$ _Ü` cm^m| Ho$ {dVaU H$m {ZU©`
holder is an issue of fundamental importance _yc ê$n go _hËdnyU© h¡ Ed§ \$m`ZopÝe`c _¡ZoOg© _¡ZoO_oÝQ>
and financial manager plays an important role H$mo nam_e© XoZo _| EH$ _hËdnyU© ^y{_H$m {Z^mVo h¢Ÿ& àm°{\$Q>
in advising the management. The retention of H$mo amoH$Zm H$ånZr H$mo EŠgnmÝeZ Ho$ {cE \$ÊS²>g H$mo
profit helps the company in mobilising funds
for expansion. In case the company has more _moãcmBÁS> H$aZo _| ghm`Vm H$aVm h¡Ÿ& `{X H$ånZr Ho$ nmg
favourable re-investment opportunities as [a-BZdoñQ>_oÝQ> Ho$ Eogo Adga CnbãY h¢ Omo _mH}$Q> _|
compared to those offered outside, it would be CnbãY Adgam| H$s VwbZm _| A{YH$ \o$dao~b h¢ Vmo ~ohVa
more profitable for company to retain profit `h hmoJm {H$ H$ånZr àm°{\$Q> H$mo {S>{dS>oÝS> Ho$ ê$n _| ^wJVmZ
rather than to pay it as dividend. H$aZo Ho$ ~Om` AnZo nmg amoH$ boŸ&
Let us take an example, Suppose the net CXmhaU Ho$ {b`o, `{X H$a MwH$mZo Ho$ ~mX EH$
profit after taxes of company is ` 1 lakh and is H$ånZr H$m ewÕ bm^ ` 1,00,000 h¡ Omo nyam eo`a hmoëS>g©
totally distributed as dividend to shareholders. _| {S>{dS>oÝS> Ho$ ê$n _| {S>ñQ´>rã`yQ> H$a {X`m OmVm h¡ Vmo
The relevant figures would then appear as gå~pÝYV Am§H$‹S>o Bg àH$ma hm|Jo:
follows:
1. Amount of dividend to shareholders ` 1,00,000
2. Less: income-tax (say at 40%) on personal incomes ` 40,000
3. Net amount available to shareholders for investment ` 60,000
4. Less: reinvestment cost say at 10% ` 6,000
` 54,000
It is clear from the above example that if Cnamoº$ CXmhaU go `h ñnï> hmoVm h¡ {H$ `{X
dividends are not paid, ` 1 lakh of income is {S>{dS>oÝS²>g H$m ^wJVmZ Zht {H$`m OmE Vmo H$ånZr Ho$ nmg
available to the company for reinvestment in {~OZog _| [aBÝdoñQ>_|Q> H$aZo Ho$ {cE `1 cmI CncãY
business. In case dividends are paid, it is likely h¡Ÿ& {S>{dS>oÝS²>g Ho$ ^wJVmZ Ho$ Ho$g _| `h ñnîQ> h¡ {H$
that not more than ` 54,000 would be available nwZ{Z©doe (g_mZ `m {H$gr AÝ` {~OZog _|) Ho$ {cE
for reinvestment (in the same or any other ` 54,000 go Á`mXm CncãY Zht h¡Ÿ& _mZm {H$ ñQ>m°H$