Financial Management 2:
Mr. Nelson Abesamis, CPA
1. Describe the effect of a dividend policy
2. Recognize the difference between the dividend
3. Discuss the types of dividend policies
4. Explain the financial and operating factors that
affect the amount of dividends paid
5. Differentiate share capital dividends and share
a distribution from the net profits of a company
to its shareholders
The policy a company uses to decide how much it will
pay out to shareholders in dividends.
1. Influences the investor’s attitude
2. Impacts financing program and capital budgeting
3. Affects cash flow
4. Lowers shareholder’s equity
R - record
D - declaration
E - ex-dividend
P - payment
• Cash dividends
• Property dividends
• Liability dividends in the form of bond or scrip
• Stock dividends or bonus issue
Dividends out of earnings
Illustration (cash dividend):
The board of directors of an entity, at their
meeting on November 20 2012 declared a
dividend of P20/share, payable April 30 2013,
to shareholders of record on December 31,
2012. The entity has 20,000 shares issued and
outstanding with par value of 100.
Illustration (property dividend):
On November 1, 2012, an entity declared a
property dividend of equipment payable on
March 1, 2013. The carrying amount of the
equipment is P3M and the fair value is P2.5M
on November 1, 2012. However, the fair value
less cost to distribute the equipment is P2.2M on
December 31, 2012, P2M on March 1, 2013.
Illustration (scrip dividend):
Scrip dividends are declared in the
amount of P200,000 payable in six
months at 12% interest.
1. Pay a predictable dividend every year.
2. Base optimal capital budget on residual
retained earnings (after dividend).
Constant dividend-payout ratio
1. Pay a constant proportion of earnings (if
2. Base optimal capital budget on residual
Goals, ranked in order of importance
Avoid cutting back on positive NPV projects to pay a
Avoid dividend cuts
Avoid the need to sell equity
Maintain a target debt/equity ratio
Maintain a target dividend payout ratio
Companies want to accept positive NPV projects, while avoiding
1 Determine the optimal capital budget.
2 Determine the retained earnings that can be used to finance the
3 Use retained earnings to supply as much of the equity investment
in the capital budget as necessary.
4 Pay dividends only if there are left-over earnings.
Factors that affect the amount of dividends paid
• Legal requirements
• Firm’s liquidity position
• Repayment need
• Expected rate of return
• Stability of earning
• Desire of control
• Access to the capital market
• Shareholder’s individual tax situation
Share capital dividends
Funds raised by issuing shares in return for cash or other
considerations. The amount of share capital a company
has can change over time because each time a business
sells new shares to the public in exchange for cash, the
amount of share capital will increase. Share capital can be
composed of both common and preferred shares.
The issuance of a substantial amount of additional shares,
thereby reducing the par value of the share capital on a
Often prompted by desire to reduce the market price per
share, making it easier for small investors to buy shares
Share Capital repurchases
A program by which a company buys back its own shares from
the marketplace, reducing the number of outstanding shares.
Share repurchase is usually an indication that the company's
management thinks the shares are undervalued. The company can
buy shares directly from the market or offer its shareholder the
option to tender their shares directly to the company at a fixed
In 2012, Elm Company bought 10,000 shares of oil company at a cost of
200,000. On December 1, 2012 Elm Company declared a property
dividend of the oil stock to shareholders of record on February 1,2013
payable on February 15, 2013. The oil stock had the following market
December 1, 2012 - 250,000
December 31, 2012 - 260,000
February 15, 2013 - 270,000
What is the net change of the property dividend against retained earnings
Tin Company had 700,000 ordinary shares authorized and
300,000 share outstanding on January 1, 2012.
Jan 31 Declared 10% stick dividend
June 30 Purchased 100,000 shares
Aug 1 Reissued 50,000 shares
Nov 30 Declared 2 for 1 share split
How many ordinary shares are outstanding?
Lunario Company declared and distributed
10% stock dividend with fair value of P1.5M
and par value of P1M and 25% stock
dividend with fair value of P4M and par
value of P3.5M. What agreeable amount
should be debited to retained earnings for the
On January 1, 2013, the BOD of Chorva Company declared a cash
dividend of 800,000 to shareholders of record on January 15, 2013
and payable on February 15, 2013. Selected data on December 31,
2012 are as follows:
Accumulated depletion 500,000
Share capital 9,000,000
Share premium 300,000
Retained earnings (Dec 31, 2012) 600,000
Net income 2012 150,000
What amount should be reported as liquidating dividend?
Notes de l'éditeur
Declaration date is the day the Board of Directors announces its intention to pay a dividend. On this day, a liability is created and the company records that liability on its books; it now owes the money to the stockholders. On the declaration date, the Board will also announce a date of record and a payment date.
Record date is the date established by an issuer of a security for the purpose of determining the holders who are entitled to receive a dividend or distribution.
Ex-dividend date classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be given ex-dividend status if a person has been confirmed by the company to receive the dividend payment.
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