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CHAKLALA POLYMERS LTD

INTRODUCTION OF A COMPANY
Chaklala polymers Ltd was founded in 2002 and listed at Karachi Stock exchange
In 2006. Its financial position over the recent past is given overleaf.
The company has been erratic in payment of dividends despite its reasonably healthy profit
and liuidity. !ith its long term loan about to be fully repai the company
"eels lists business has b been stabili#e enough to enter into the expansion phase.
$everal proposals for e%panding the production of e%isting plant and installation of a new plan to
manufacture a new line of chemicals are currently under consideration.
Company&s cost of euity is '6( while its debt cost is '2(. It corporation ta% rate is around
)*(. The e%pansion programs are e%pected to improve the company&s overall return on capital
employed due to economies of scale.
INTRODUCTION OF DI!IDEND
a sum of money paid regularly +typically annually, by a company to its shareholders out of its
profits +or reserves,
Definition of 'Dividend'
A share of the after-tax profit of a company, distributed to
its shareholders according to the number and class of shares held by them.
Smaller companies typically distribute dividends at the end of an accounting year,
whereas larger, publicly held companies usually distribute it every quarter.
The amount and timing of the dividend is decided by the board of directors, who
also determine whether it is paid out of current earnings or the past earnings kept
as reserve. olders of preferred stock receive dividend at a fixed rate and are paid
first. olders of ordinary shares are entitled to receive any amount of dividend,
based on the level of profit and the company!s need for cash for expansion or other
purposes. "orporate legislation generally forbids payment of dividend out of
anticipated but not yet received #unreali$ed% profit. &ormally all
dividend payments are taxable, often at the source.
Companys objectives in relation to dividend
payouts
It refers to a conscious decision taken by the management of company as to how will it treat its
available earning e.g. what portion of it will be distributed as cash dividend, what will be retained
but left distributable and what portion will be permanently retained. When this policy is
formulated, it is intended to be applied for a considerable number of years. Say three to five
years, not just one particular year.
easons and !nalysis"
Should company maintain a stable
dividend payout ratio or stable dividend
per share amount#
1. Di"ie# payout ratio is the ratio of dividend per share divided
by earnings per share. 't is a measure of how much earnings a company is paying out to
its shareholders as compared to how much it is retaining for reinvestment.
(ormula
)ividend *ayout +atio ,
)ividend per Share
-arnings per Share
)ividend payout ratio can also be calculated as total dividends divided by net income.
Analysis
A shareholder has two sources of return, namely periodic income in the form of dividends and
capital appreciation. )ividend payout ratio tells what percentage of total earnings the company is
paying back to shareholders. A healthy dividend payout ratio leads to investor confidence in the
company.
*lowback ratio #also called retention rate% is equals . / payout ratio and it equals the earnings
retained divided by total earnings for the period.
-xample
0eta 1td. earned an -*S of 23 in (4 35.. when it paid 2. per share as dividends. (ind its
dividend payout ratio.
Solution
)ividend *ayout +atio , )*S6-*S , 2.623 , 758
$Di"ie#% per Share

The formula for dividends per share, or )*S, is the annual dividends paid divided by the
number of shares outstanding.
Per Share
The denominator of the dividends per share formula generally uses the annual weighted
average of outstanding shares. The weighted average is also used with the earnings per
share formula. owever, there are key differences between these two formulas. The
numerator for earnings per share is net income, or earnings. The numerator for the
dividends per share formula is dividends. -arnings is effectively a continuous process
throughout the year whereas dividends are paid at a given moment.
ow often a company pays a dividend may warrant consideration for how to calculate
the per share portion of the formula when using financial analysis for investments.
An unlikely figurative example would be a company who paid dividends in 9anuary with
3,555 outstanding shares and issued 35,555 additional shares in )ecember. The result
of the dividends per share formula would vary greatly depending on which method is
used for determining the number of shares outstanding. "onsidering that the dividend
yield formula uses dividends per share, it would vary greatly as well.
owever, another hypothetical company pays dividends monthly and has issued
common shares periodically throughout the year. :ne may consider using the weighted
average in this example.
Co#%e&ue#'e% of 'a%h i"ie#
When a corporation declares a cash dividend on its stock, its retained earnings are decreased
and its current liabilities (Dividends Payable) are increased. When the cash dividend is paid, the
Dividends Payable account is decreased and the corporation's Cash account is decreased.
The net result of the declaration and payment of the dividend is that the corporation's assets
and stockholders' equity have decreased. Specifically, the balance sheet accounts Cash and
Retained Earnings were decreased.
The income statement is not affected by the declaration and payment of cash dividends on
common stock. (The cash dividends on preferred stock are deducted from net income to arrive
at net income available for common stock.)
The cash dividends will be reported as a use of cash in the financing activities section of the
statement of cash flows.
Co(pa#y %houl (ai#tai# )ala#'e
)et*ee# 'a%h i"ie#% a# )o#u%
%hare%
Family owned 57% equity