STRATEGIC FINANCE

PROJECT OF FALL 2018

SUBMITTED TO: PROF. SAFDAR ALI BUTT

SUBMITTED BY: GROUP “D”
AYESHA DILDAR MMS 173004
GHANIA NAEEM MMS 173024
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ROOHA BALOCH MMS 183025
QURAT UL AIN MMS 183041
Case study
Dividend policy
CHAKLALA POLYMERS LTD

Introduction:
We assign the project, to make the suitable dividend policy on the basis of provided information
that is available in balance sheet at the year of 2012. According to balance sheet, company have
room to take long-term debt for the purpose of business expansion, company also have good
reputation as they fully repaid long-term loans and also make healthy profits but they are
irregular in paying cash dividends therefore it is necessary to make the suitable dividend policy
in order to meet the shareholder’ expectation that lead to sustain market price of the shares.

Issues need to address while making dividend policy for Chaklala Polymers Ltd.
Company maintain DPO or DPS policy and reason of adopting this particular policy?
What balance, if any, needs to maintained b/w cash dividend and bonus shares?
Considering the company’s expansion programs, will it be advisable to continue paying cash
dividends?
What other factor need to be considered when finalizing the dividend rates for the next five
years?
In light of your suggestions, what amounts of cash dividend per share be paid and/or bonus
shares issues be made, in each of the next five years. Give reason for your recommendations?
Adopting Dividend Per Share (DPS)
After studying the complete information, we have decided to adopt the DPS policy on the basis
of following reason.
a. Growing dividends.
Under this policy dividend per share in rupee terms is constant but change in total amount being
paid as dividend out of net earnings that will change year to year. Those companies who follow
DPS there dividend definitely grow gradually.
b. Consistent with company as well as shareholders.
DPS policy is fit b/w organization and shareholders. From organization perspective company’s
reputation increase as they pay regular dividends that give positive impact in order to maintain
market price of shares. From shareholders’ perspective as they receive regular dividends that also
increase gradually so in this way shareholder feel encouragement to hold the shares of that
company.
c. Easy calculation
Easy and common to express dividend per share in terms of percentage of par-value.
d. Stability and predictability
DPS is the stable policy to maintain the regular dividends to meet the shareholder’s expectation
and it is also expected that company maintain the higher dividend per share in future.
Reasons of neglecting DPO
a. Fixed percentage of net earnings.
It is the policy at which company pays fixed percentage of net earnings every year and the
amount of dividend strongly related to the net earnings.
b. Shareholder’s expectation
If company pays fixed percentage of net earnings and there is no growth in dividends that
situation creates distress among shareholders and will sell the shares when they feel complete
dissatisfaction.
Company prefer to pay Cash Dividends instead of issuing bonus shares
Reasons of paying cash dividends
a. Shareholders Expectations
According to Company’s 2012 balance sheet, the company is irregularly making payments of
dividends despite of healthy profits and liquidity, long-term loans has also been fully repaid.
If company continuously pays dividends than shareholders expectation meet, as a result
shareholders of the company feel motivated and hold shares for longer time period.
b. Growth Opportunities
If the company pays cash as dividend among their shareholders, the market perceives that new
investment and growth opportunities are available to the company and company is going to avail
those opportunities.
c. Company’s Good reputation
If the company distributes cash as dividend among its shareholders, it gives the signal in the
market that company is earning huge profits. In this way the market value of shares increases and
more people get interested to invest in that company.
d. Decrease the cost of equity.
Benefit of paying cash dividends is to decrease the cost of equity that is greater than cost of
borrowing funds
Both objectives achieved (expansion program, paying cash dividends)
Company can effectively manage their expansion program and paying cash dividends so in this
way market price of share increases.
Reasons not to issue bonus shares
a. Irregular cash dividends
As company’s history dictates that they are erratic to paying cash dividends to their shareholders
that put negative impact on shareholders. If the company issues bonus shares instead of paying
cash dividends, it results in demotivation for the shareholders. In this way shareholder’s
expectations can’t meet.
b. No need to share the part of profit
If the company issues bonus shares instead of paying cash dividends, it gives the signal in the
market that company is suffering from loss or does not want to share their profit with the
shareholders. In this way the market value of shares decreases.
Considering the company’s expansion program, is it advisable to continue
paying cash dividends?
As the company is going for expansion program, most probably going to invest in new project,
so in this case any new project takes at least 3 years to recover its cost and makes profit. Yes, it
is advisable for the company to distribute cash as dividend among their shareholders as it
enhances the company’s good reputation and meet the shareholder’s expectations.
2013
In this year company will not pay any dividend to their shareholders, as company is going for an
expansion program which requires cash, so company will retain the profit to invest in that
project.
2014
In this year company will pay dividend to their shareholders to meet their expectations as well as
to increase the market value of shares through good reputation. When company starts paying
dividend it gives positive signal in the market. In this year if company will not pay any dividend
then it will give negative signal in the market. To maintain good reputation of the company, firm
should have to pay dividend this year.
2015
In this year company will sustain the same dividend rate with a minimal increase as they are in
growing age. Company is not earning enough profit to distribute among their shareholders. So
the company will sustain the same dividend rate with a slight increase to meet the shareholder’s
and market’s expectation.
2016
In this year company will pay higher dividend from the previous year to their shareholders. It
will give the positive signal in the market that company is earning huge profits which results in
increase in market value of shares.
2017
In this year company will pay higher dividend to their shareholders as compared to previous
year. It results in enhancement of good reputation of the company and also increases the market
value of shares of the company. It also attracts the new investors for the company.

Factors need to consider when finalizing the dividend rates for the next five
years.
Many other factors that effect when company decides the dividend rates for future based on
forecasting. Following are the factors that company should consider while deciding dividend
rates for next five years.
 a. Shareholder’s Expectation
Shareholder is the owner of the company as they expect from company to pay regular cash
dividends as many shareholders depend on cash dividends for their living.
b. Market Expectation
It is necessary to address the market expectation. Collect information about market that what
market expects from company and what step should be taken to make market happy.
Common market expectations are
 Low price of security that will boost the selling.
 Large number of investors.
 Information regarding financial security well known to all investors so they are able
to take better decision.
c. Cost of Borrowing
If the cost of borrowing is lower than cost of equity then company decides to pay cash as
dividend to their shareholders. On the other hand, if cost of borrowing is higher than cost of
equity then company will prefer to retain the profit and go for temporary retaining or permanent
retaining by issuing bonus shares.
d. Internal Constraints
Internal constraints like shortage of cash prevent the company from paying cash dividends. It
influences the company to issue bonus shares instead of paying cash dividends.
e. Tax Consideration
If the company decides to issue bonus shares instead of cash dividends, it results in favor of
shareholders because bonus shares are free from tax implication.
f. Legal Constraints
Legal constraint also plays an important role while deciding the dividend policy. Banks that lend
long term loans to the company restraints it from paying cash dividend until the bank recover its
funds.
What amounts of cash dividend per share be paid and/or bonus shares issues
be made, in each of the next five year?
As the company is going to pay dividend per share to their shareholders instead of issuing bonus
shares so it has to maintain that level which can meet the shareholders as well as markets
expectations. Company should pay 55% to 75% cash dividend per share to their shareholders as
it will results in good reputation of company in the market and gives positive signal about the
growth and expansion of the company. It also motivates investors to invest in this company as
they perceive that company is earning huge profits and so many growth opportunities are
available to it. In this way market value of company’s shares also increases.
2013
In the year 2013, company will not pay cash dividend because company is going for expansion
program and requires cash so it will not divide cash as dividend among their shareholders.
Company will invest cash in new project this year.
Dividend payout ratio for year 2014
Earnings after tax= Rs.180 million
Outstanding shares=48 million
Dividend=55%
55% of 180 million is Rs.99 million will be distributed as dividend among 48 million shares.
Dividend per share for year 2014
Dividend per share for 2014 will be Rs.99 million divided by 48 million equals to Rs.2.06.
Dividend payout ratio for year 2015
Earnings after tax= Rs.180 million
Outstanding shares=48 million
Dividend=58%
58% of 180 million is Rs.104.4 million will be distributed as dividend among 48 million shares.
Dividend per share for year 2015
Dividend per share for 2015 will be Rs.104.4 million divided by 48 million equals to Rs.2.18.
Dividend payout ratio for year 2016
Earnings after tax= Rs.180 million
Outstanding shares=48 million
Dividend=60%
60% of 180 million is Rs.108 million will be distributed as dividend among 48 million shares.
Dividend per share for year 2016
Dividend per share for 2016 will be Rs.108 million divided by 48 million equals to Rs.2.25.
Dividend payout ratio for year 2017
Earnings after tax= Rs.180 million
Outstanding shares=48 million
Dividend=65%
65% of 180 million is Rs.117 million will be distributed as dividend among 48 million shares.
Dividend per share for year 2017
Dividend per share for 2017 will be Rs.117 million divided by 48 million equals to Rs.2.44.
Years 2013 2014 2015 2016 2017
Dividend per 0 2.06 2.18 2.25 2.44
Share(DPS)
in Rs.

Draw an Effective Dividend Policy.

It is difficult to draw an effective dividend policy because shareholder’s satisfaction based on
that policy and consider the company’s perspective as they are able to pay the dividends i.e.
mention on dividend policy. Therefore, it is necessary to make the suitable dividend policy and
decide the satisfactory cash dividend per share under the consideration of company’s expansion
program.
Initially company pay minimum dividend per share because of expansion program, once the
initial investment of company recovers than company starts offering high dividends according to
the company’s profit.
Making an effective dividend policy is a big challenge because it is for long-term so therefore it
is necessary to gather useful information and address all the important factors that affect
dividend policy and put the meaningful information in order to receive the fruitful result.
According to the above decided policy it will help the CHAKLALA POLYMERS to meet their
shareholders expectation as well as the market expectations. It will also help the company to
increase its market value of shares.
This policy helps the company to go for diversification and avail the growth and investment
opportunities which will give the positive signal in the market about company. It also results in
increase in market value of shares and also attracts the new investors for the company.
CONCLUSION
As we know, it is the fact that every business faces uncertainty so it is also important to consider
the uncertainty while drawing dividend policy in order to make it a flexible policy. If need
occurs that can be changed according to the given situation and circumstances. Therefore, policy
makers make room for changes by considering the uncertainty factors and also develop
alternative for unknown events that would appear in future. Policy should be flexible not be rigid
to meet the shareholder’s and market’s expectation.