Question

Question 2 a) Identify and discuss three types of dividend policy that maybe used by a company, giving examples of each type. (7 marks) b) Discuss the various signals that may be sent to the market from a company's dividend policy. (8 marks)

Answer 1

answer (a)

Dividend policy is the policy a company uses to reward its dividend payout to shareholders.

Types of Dividend Policy:

The various types of dividend policies

(a) Regular Dividend Policy:

Installment of dividend at the typical rate is named as standard dividend. The speculators, for example, resigned people, widows and other monetarily more vulnerable people want to get normal dividends.

An ordinary dividend policy offers the accompanying focal points:

(a) It establishes a profitable record of the organization.

(b) It makes certainty among the investors.

(c) It helps in long haul financing and renders financing simpler.

(d) It stabilizes the market estimation of offers.

(e) The conventional investors see dividends as a wellspring of assets to meet their everyday costs.

(f) If benefits are not distributed routinely and are held, the investors may need to pay a higher pace of assessment in the year when amassed benefits are distributed.

In any case, it must be remembered that normal dividends can be kept up just by organizations of long standing and stable income, An organization ought to establish the ordinary dividend at a lower rate when contrasted with the normal profit of the organization.

(b) Stable Dividend Policy:

The term 'stability of dividends' methods consistency or absence of variability in the flood of dividend installments. In increasingly exact terms, it implies installment of certain base measure of dividend routinely.

A stable dividend policy might be established in any of the accompanying three structures:

(I) Constant dividend per share:

A few organizations follow a policy of delivering fixed dividend per share regardless of the degree of income quite a long time after year. Such firms, for the most part, make a 'Hold for Dividend Equalization' to enable them deliver the fixed dividend even in the year when the profit are not adequate or when there are misfortunes.

A policy of steady dividend per share is generally suitable to concerns whose income are relied upon to stay stable over a number of years.

(ii) Constant payout proportion:

Consistent compensation out proportion implies installment of a fixed level of net profit as dividends consistently. The measure of dividend in such a policy vacillates in direct extent to the income of the organization. The policy of steady compensation out is favored by the organizations because it is identified with their ability to deliver dividends. Figure given below shows the behavior of dividends when such a policy is followed.

(iii) Stable rupee dividend in addition to additional dividend:

A few organizations follow a policy of delivering steady low dividend per share in addition to an additional dividend in the long stretches of high benefits. Such a policy is generally suitable to the firm having fluctuating income from year to year.

c) Irregular dividend:

as the name proposes here the organization doesn't deliver standard dividend to the investors. The organization utilizes this training because of following reasons:

Because of questionable procuring of the organization.

Because of absence of fluid assets.

The organization at some point terrified of giving standard dividend.

Because of less effective business.

answer(b):

Dividend signaling is a theory that suggests that company announcements of dividend increases are an indication of positive future results.

Increases in a company's dividend payout generally forecast a positive future performance of the company's stock.

The dividend signaling theory suggests that companies that pay the highest dividends are, or should be, more profitable those paying smaller dividends.

Profitability

The dividend signaling theory recommends that organizations delivering the most significant level of dividends are, or ought to be, more profitable than in any case than identical organizations delivering littler dividends. This idea shows that the signaling theory can be questioned if a speculator looks at how widely current dividends go about as indicators of future income. Prior examinations, directed from 1973 to 1978, presumed that a company's dividends are basically disconnected to the profit that follow.

Stock prices tend to rise when a company announces an increase in dividend payouts and fall when dividends are to be decreased. The researchers concluded that there is no discernible difference between the hypothesis that an increased dividend conveys good news and the hypothesis that the dividend increase is good news for investors.

So what signs can dividend declarations send?

Changes to an organization's dividend policy basically don't go unnoticed. Indeed, they truly shouldn't go unnoticed when you consider it. First consider that when a change to the dividend level is made, it is normally made in light of the long haul. Along these lines, either increments or diminishes to current dividend levels profoundly affect the market's standpoint about a specific organization. On this, dividend changes are made by inner work force. Along these lines, it is imagined that these individuals have more prominent understanding into the organization's standing which is the reason this kind of action is viewed as a sign.

This dividend action can incorporate declaring a dividend, disposing of a dividend, expanding a dividend or diminishing it. How about we break this into two classes - positive signals and negative ones.

Instances of a positive dividend signal.

Dividend exercises that are supported by the market are either the declaration of a dividend, or the expanding of current dividend levels. Both of these are viewed as pointers that the organization can bear to pay out a greater amount of its income to investors. This implies they have a consistent hold of income to sit on. Instead of keep the cash in its money holds, the firm is deciding to take care of it to investors. This proposes the organization is certain that it won't need it to run the tasks. It is a positive sign that the organization can expect continuing degrees of future working salary. Regularly, you will see the organization's stock cost increment in both of these situations.

Instances of a negative dividend signal.

Dividend flags that are bad will in general be either the end of a dividend that once existed, or the diminishing of current dividend levels. Both of these are markers that the organization can't stand to plowback income to its investors. In spite of the fact that, we shouldn't constantly race to the most dire outcome imaginable. It might be that the organization has found new open doors that require speculation. Albeit by and large, debt would be utilized in such a case. Accordingly, an organization's stock value will in general decay as the aftereffect of both of these cases.

Why it's better to keep your dividends stable.

As should be obvious from the above action, slight dividend changes can influence an organization's stock cost. Despite the fact that a dividend raise may build your stock cost, in the event that you declare excessively high of a dividend and later need to bring down it, at that point your stock cost will drop. Organizations must be certain that they can bolster a specific dividend level so as to fulfill the market. Remember, it is a choice that is made in light of the long haul. Be certain to consider how it is deciphered by the more noteworthy market.

The bottom line is that you should deliver consideration regarding the dividend exercises of different organizations. With a bit of research and translation it can give you a look into the organization's money related standing. What's more, with that, you can level the financial exchange playing field once you comprehend what the expert dealers know. Our Elite Legacy Education teachers will acquaint you with the exchanging techniques that produce potential benefit when stock costs are falling, just as approaches to secure increases, diminish hazard, and crush additional cash out of stocks in your portfolio.