Stock

It represents the residual assets of the

company that would be due to stockholders
after discharge of all senior claims such as
secured and unsecured debt

History of Stock
During the Roman Republic, the state contracted
(leased) out many of its services to private companies.
These government contractors were called publicani,
as individual company. These companies were similar to
modern corporations, or joint-stock companies more
specifically, in a couple of aspects. They issued shares
called partes (for large cooperatives) and particulae
which were small shares that acted like today's overthe-counter
shares.

History of Stock
The earliest recognized joint-stock company in
modern times was the English (later British) East
India Company, one of the most famous jointstock companies. It came in 31 Dec 1600.
Soon afterwards, in 1602, the Dutch East India
Company issued the first shares that were made
tradeable on the Amsterdam Stock Exchange

Features of Common Stock

Common stocks provide a share of ownership
in the company.
Common stockholders have the right to vote
at annual meetings.
Common shareholders are entitled to receive
dividend payment, if they are authorized by
the corporation's board of directors.
Preemptive rights

Stock issuing process:

Deciding Whether to Issue Stock
1.Familiarize yourself with the basics of
issuing stock
2. Review the benefits of issuing stock
3. Examine the disadvantages of issuing
stock
4. Consider alternatives to issuing stock

Issuing Stock
1. Determine how much capital you need

2. Determine how much stock the corporation is

authorized to issue 3. Set forth the value of the shares
that will be issued.
4. Determine the class of the shares to be issued.
5. Determine the number of shares to issue.
6. Make sure you are in compliance with state and
federal securities law
7. Draft the Stock Subscription Agreement
8. Complete the transaction

Types of Stocks

Advantages of Common Stocks

Serve as Ideal Investment
Offer Restricted Legal Liability
Can be Sold and Bought Easily
Offer High Earning
Yield huge gains.
Easy buying and selling process.
There are two ways to gain benefits.

Disadvantages of Common
Stocks
High risk investment.
Lack of control.
Last one to get paid

History of stock in Pakistan

Karachi Stock Exchange Limited (KSE) was
Founded on September 18, 1947.
A total of 654 companies were listed on December
8, 2009 with a market capitalization of Rs. 8.561
trillion (US$120.5 billion) having listed capital of
Rs. 2805.873 billion (US$40.615 billion). The KSE100 Index closed at 11,967 on May 16, 2011. Total
market capitalization of the PSX reached Rs 2.95
trillion (US$35 billion approximately) on July 30,
2011. As on July 10, 2015, total market

Pakistan Stock Market (KSE100) 1990-2016 |

Data | Chart | Calendar

Introduction
What is Dividend?
What is dividend policy?
Theories of Dividend Policy
Relevant Theory
Walters Model
Gordons Model
Irrelevant Theory
M-Ms Approach
Traditional Approach

What is Dividend?
A dividend is a distribution to shareholders out of
profit or reserve available for this purpose.
- Institute of Chartered Accountants of Pakistan

Forms/Types of Dividend
On the basis of Types of Share
Equity Dividend
Preference Dividend

On the basis of Mode of Payment

Cash Dividend
Stock Dividend
Property Dividend

On the basis of Time of Payment

Interim Dividend
Regular Dividend
Special Dividend

What is Dividend
Policy :

Dividend policy determines the division of

earnings between payments to shareholders and
retained earnings.
- Weston and Bringham

Dividend Policies involve the decisions,

whether-

To retain earnings for capital investment and

other purposes; or
To distribute earnings in the form of dividend
among shareholders; or
To retain some earning and to distribute
remaining earnings to shareholders.

Factors Affecting Dividend Policy

Legal Restrictions
Magnitude and trend of earnings
Desire and type of Shareholders
Nature of Industry
Age of the company
Future Financial Requirements
Stage of Business cycle
Requirements of Institutional Investors
Investment Opportunities
Desire for Financial Solvency and Liquidity

Dimensions of Dividend Policy

Pay-out Ratio
Funds requirement
Liquidity
Access to external sources of financing
Shareholder preference
Difference in the cost of External Equity and
Retained Earnings
Control
Taxes

 Stability
Stable dividend payout Ratio
Stable Dividends or Steadily changing Dividends

TYPES OF DIVIDEND POLICY

1. On the basis of Companys General
Perspective
2. On the basis of a Research Study
3. On the basis of Stability of Dividend

TYPES OF DIVIDEND POLICY

1. On the Basis of Companys General
Perspective
regular
dividends
Whether dividend should be paid right from the initial year of operations,
stable dividends
Whether equal amount or fixed percentage of dividend be paid every year,
irrespective of the quantum of earnings as in case of preference shares,
fixed payout ratio
Whether a fixed percentage of total earnings be paid as dividend which
would mean varying amount of dividend per share every year, depending on
the quantum of earnings and number of ordinary shares in the year, i.e., a
property dividend or bonus share dividend
Whether the dividend be paid in cash or in the form of shares of other
companies held by it or by converting (accumulated) retained earnings into
bonus shares, i.e.,

TYPES OF DIVIDEND POLICY

2. On the Basis of Research Study
On the basis of the nature of industry such as
whether industry belongs to electrical, chemicals,
fertilisers, FMCS, automobiles, pharmaceuticals,
textiles, a research study classified dividend policy
into three types. They are:
Generous dividend policy
More or less fixed dividend policy
Erratic dividend policy

TYPES OF DIVIDEND
POLICY
3. On the Basis of the Stability of
Dividend
Stable dividend per share
Stable percentage of net earnings
Stable rupee dividend plus extra dividend
Dividends as a fixed percentage of market
value

DIVIDEND THEORIES

Dividend Theories
Irrelevance Theories
(i.e. which consider
dividend decision to be
irrelevant as it does not
affects the value of the
firm)

Relevance Theories
(i.e. which consider
dividend decision to be
relevant as it affects the
value of the firm)

Walters
Model

Gordons
Model
Modigliani and
Millers Model

Traditional
Approach

Relevance Theories

Walters Model
Prof. James E Walter argued that in the long-run
the share prices reflect only the present value of
expected dividends. Retentions influence stock
price only through their effect on future
dividends. Walter has formulated this and used
the dividend to optimize the wealth of the equity
shareholders.

Assumptions of Walters Model

Internal Financing
constant Return in Cost of Capital
100% payout or Retention
Constant EPS and DPS
Infinite time

Formula of Walters Model

P
Where,

D + r (E-D)
k
k

P = Current Market Price of equity share

E = Earning per share
D = Dividend per share
(E-D)

= Retained earning per share

r = Rate of Return on firms investment or Internal

Rate of Return
k = Cost of Equity Capital

Illustration :
Growth Firm (r > k):
r = 20% k = 15% E = Rs. 4
If D = Rs. 4
P = 4+(0) 0.20 /0 .15 = Rs. 26.67
0.15
If D = Rs. 2
P = 2+(2) 0.20 / 0.15 = Rs. 31.11
0.15

Illustration :
Normal Firm (r = k):
r = 15% k = 15% E = Rs. 4
If D = Rs. 4
P = 4+(0) 0.15 / 0.15 = Rs. 26.67
0.15
If D = Rs. 2
P = 2+(2) 0.15 / 0.15 = Rs. 26.67
0.15

Illustration
Declining Firm (r < k):
r = 10% k = 15% E = Rs. 4
If D = Rs. 4
P = 4+(0) 0.10 / 0.15 = Rs. 26.67
0.15
If D = Rs. 2
P = 2+(2) 0.10 / 0.15 = Rs. 22.22
0.15

Effect of Dividend Policy on Value of Share

Case

If Dividend Payout ratio

Increases

If Dividend Payout
Ration decreases

1. In case of Growing firm

i.e. where r > k

Market Value of Share

decreases

Market Value of a share

increases

2. In case of Declining firm

i.e. where r < k

Market Value of Share

increases

Market Value of share

decreases

3. In case of normal firm

i.e. where r = k

No change in value of
Share

No change in value of
Share

Criticisms of Walters Model

No External Financing
Firms internal rate of return does not always
remain constant. In fact, r decreases as more
and more investment in made.
Firms cost of capital does not always remain
constant. In fact, k changes directly with the
firms risk.

Gordons Model
According to Prof. Gordon, Dividend Policy almost always
affects the value of the firm. He Showed how dividend
policy can be used to maximize the wealth of the
shareholders.
The main proposition of the model is that the value of a
share reflects the value of the future dividends accruing
to that share. Hence, the dividend payment and its
growth are relevant in valuation of shares.
The model holds that the shares market price is equal to
the sum of shares discounted future dividend payment.

Assumptions
All equity firm
No external Financing
Constant Returns
Constant Cost of Capital
Perpetual Earnings
No taxes
Constant Retention
Cost of Capital is greater then growth rate (k>br=g)

Zero Growth Model

If we assume that dividend for common
stockholder will be the same every year
DIV1 = DIV2 =DIV3==DIV
Under zero growth model, stockholders
anticipate to receive the same amount of
dividend per year forever
Thus, we have a perpetuity of dividends
Price of Stock will equal the present value of this
perpetuity

Formula of Gordons Model

P

D1
K-g

Where,
P = Price
E = Earning per Share
k = Cost of Capital
br = g = Growth Rate

Criticisms of Gordons
model
As the assumptions of Walters Model and
Gordons Model are same so the Gordons
model suffers from the same limitations as
the Walters Model.

Irrelevance Theories

Modigliani & Millers Irrelevance Model

Value of Firm (i.e. Wealth of Shareholders)

Depends on

Firms Earnings
Depends on

Firms Investment Policy and not on

dividend policy

Modigliani and Millers Approach

Assumption
Capital Markets are Perfect and people are Rational
No taxes
Floating Costs are nil
Investment opportunities and future profits of firms
are known with certainty (This assumption was
dropped later)
Investment and Dividend Decisions are independent

M-Ms Argument
If a company retains earnings instead of giving it out as
dividends, the shareholder enjoy capital appreciation
equal to the amount of earnings retained.
If it distributes earnings by the way of dividends instead of
retaining it, shareholder enjoys dividends equal in value to
the amount by which his capital would have appreciated
had the company chosen to retain its earning.
Hence,
the division of earnings between dividends and retained
earnings is IRRELEVANT from the point of view of
shareholders.

Formula of M-Ms Approach

Po
Where,

1
=
( D1+P1 )
(1 + p)

Po = Market price per share at time 0,

D1 = Dividend per share at time 1,
P1 = Market price of share at time 1

Criticism of M-M Model

No perfect Capital Market
Existence of Transaction Cost
Existence of Floatation Cost
Lack of Relevant Information
Differential rates of Taxes
No fixed investment Policy
Investors desire to obtain current income

Traditional Approach
This theory regards dividend decision merely as
a part of financing decision because
The earnings available may be retained in the
business for re-investment
Or if the funds are not required in the business they
may be distributed as dividends.

Thus the decision to pay the dividends or retain

the earnings may be taken as a residual decision

Traditional Approach
This theory assumes that the investors do not
differentiate between dividends and retentions by
the firm
Thus, a firm should retain the earnings if it has
profitable investment opportunities otherwise it
should pay than as dividends.

Synopsis
Dividend is the part of profit paid to
Shareholders.
Firm decide, depending on the profit, the
percentage of paying dividend.
Walter and Gordon says that a Dividend
Decision affects the valuation of the firm.
While the Traditional Approach and MMs
Approach says that Value of the Firm is
irrelevant to Dividend we pay.

Effect of Cash Dividend

H1 = Dividend shows negative relationship with
the stock price.
H2 = Dividend shows positive relationship with
the EPS.
H3 = Stock price shows negative relationship
with the earning per share.
H4 = Dividend shows negative relationship with
the tax. H5 = Stock price shows negative
relation with the tax.

Bank Alfalah

UBL

MCB

Statist
ic
Alfla _EPS
MCB_EPS
UBL_EPS
Alfa_
dividend
UBL_
dividend
MCB
_dividend
Alfa_ tax
MCB _tax
UBL_ tax
Alfa_ SP
UBL_SP

5
5
5

Minimum

Maximum

Mean

Std. Deviation

Statistic

Statistic

Statistic

Statistic

3688875

9833875.00

6003672.0000

2052666
9
1115993
0

49342656.00
26049777.00

2383986.3748

7
33626004.20 11742522.590
00
33
18991187.80 6161585.5744
00

1078310.8000

5
1382690.4509

Skewness

Kurtosis

Std.

Statisti

Error

Std. Error

1.212

.913

1.716

2.000

.336

.913

-1.456

2.000

-.049

.913

-1.797

2.000

1.986

.913

3.954

2.000

Statistic

248217

3490061.00

587989

886442.00

691658.2000 137011.76233

.889

.913

-1.645

2.000

459741

617554.00

556819.6000

-.989

.913

.843

2.000

119281

12058273.00

2800428.2000

2.219

.913

4.936

2.000

6492966

12058273.00

9340767.0000

-.074

.913

-2.002

2.000

4841814

9022199.00

6942146.6000

.165

.913

-2.684

2.000

10.31

45.51

18.9020

15.03243

2.123

.913

4.571

2.000

47.43

120.27

72.1594

28.60611

1.634

.913

2.809

2.000

62500.40975
5183493.2777
9
2316434.8589
2
1870946.8168
9

Stock Dividend

Bonus Issues
Particulars
No. of Companies

Percentage

Companies having
positive mean return

37

61%

23

39%

during event window

Companies having
negative mean return
during event window

Companies having positive

mean return on

38

63.4%

22

36.6%

60

100%

announcement date

Companies having negative

mean return on announcement
date

Total