1. Introduction :
The objective of any financial investment is to achieve a return Proportional to the size of investment risks and achieve the goal of maintaining the purchasing power of invested funds. in light of the continuous rise in the level of inflation. The return on investment in the shares of companies listed in the financial markets three sources, the first is the annual cash dividends distributed by the shareholders to shareholders, and the second share of the grant or free shares distributed by companies to shareholders between time period and another, and the third capital gains resulting from the high prices of shares of companies In the market during the year due to demand and supply factors.
The high market capitalization of any company is reinforced by the continued growth in corporate profits, which is reflected positively on the ratio of dividends and corporate financial indicators. Capital gains from higher corporate stock prices are usually the short-term goal of investors, while long-term investors are concerned with cash dividends.
The annual cash dividend takes into account many factors, foremost of which is the safety of the financial position of the companies after the dividends and profits achieved during the year. The higher annual profits achieved , the better company’s share of profits, and the percentage dividend in last years influence and maintain the percentage of dividend distribution .
Cash flows and the availability of cash also play a prominent role in encouraging companies to distribute cash dividends, as in the banking sector, has good financial and liquidity indicators. The company may have made big profits, but these profits may have been retained and used to increase the company’s assets. This is especially true for companies that are growing at a high rate and using all available funding sources to finance expansions and acquisitions.
Companies suffer from a liquidity deficit in the economic downturn, due to lower sales, which reduces the ability of companies to distribute profits. Small and new companies have limited capacity to borrow from banks or finance by issuing shares, because they are not well known by banks and investors, forcing them to capture a large proportion of profits realized, compared to large and old companies that distribute higher dividend rates to shareholders
The Board of Directors elected by shareholders generally proposes to the General Assemblies the percentage of profits to be distributed to the shareholders. The Board of Directors’ proposals are usually accepted by the shareholders as they hold an important share of the company’s capital.
The laws stipulate that profits should not be distributed unless they have already been realized, or have been derived from profits of previous years, and have not been the result of a revaluation. The distribution of profits depends on the availability of liquidity, which enables companies to pay their obligations on time, does not affect the capital of the company, which is a guarantee of creditors to recover their money. The requirements for expansion and investment require companies to mobilize the latter’s financial capabilities. Dependence on self-financing sources may be better than resorting to high-cost external financing sources, which calls for companies to hold profits instead of distributing them.
Market speculators usually favor the largest percentage of profits to be raised by companies in order to raise their market price, unlike long-term investors. The public shareholding companies may, in order to finance their activities, obtain loans from third parties and are therefore obliged to pay the value of these loans and their interest on the due dates. Companies that wish to raise the external debt or become a permanent part of the capital structure tend to hold a large part of their profits until the debt is repaid.
Knowing the size and direction of profits in the future is an important aspect of the profit distribution policy. The relatively stable profitability of the company encourages the distribution of a high percentage of its net profit because it can predict its future profits. If the profit rate is unstable and unpredictable The Company is encouraged to retain a significant portion of its current profits, maintaining a certain level of distribution in the event of a decrease in profits.
A number of companies in the region do not distribute dividends to their shareholders due to a large decline in their operating profits or losses. A large number of investors prefer to buy shares of companies that distribute dividends to their shareholders as they have good financial, profitability and liquidity indicators. It should be noted that the laws in many countries allow companies to distribute their annual profits in two installments.
2. LITERATURE REVIEW
Definition :
Dividend policy can be defined as being a set of guidelines a firm uses to decide how much of its earnings to pay out as dividends to the certain shareholders (Brealey, Myers & Allen 2011). According to the Institute of Chartered Accountants of India, dividend is “a distribution to shareholders out of profits or reserves available for this purpose.â€. According to (Maheshwari 1999 ) “Dividend may be defined as the return that a shareholder gets from the company, out of its profits, on his shareholdings.â€
When a company has a surplus at the end of an accounting cycle, they may have two options regarding profit management. The firm can either distribute some of its earnings as dividends, or it can take the decision to re-invest the money back into the firm as retained earnings. The firm’s board of directors makes this decision. (Tuomas, 2016).
2.1 Types of Dividend policy
There are several ways to classify dividends. First, dividends can be paid in cash or as additional stock. Stock dividends increase the number of shares outstanding and generally reduce the price per share. Second, the dividend can be a regular dividend, which is paid at regular intervals (quarterly, semi-annually, or annually), or a special dividend, which is paid in addition to the regular dividend. Most U.S. firms pay regular dividends every quarter; special dividends are paid at irregular intervals. Finally, firms sometimes pay dividends that are in excess of the retained earnings they show on their books. These are called liquidating dividends and are viewed by the Internal Revenue Service as return on capital rather than ordinary income. As a result, they can have different tax consequences for investors.
2.1.1 Cash dividend payment:
There are several important dates to note when a firm’s board of directors declares a dividend. These include:
• Declaration Date: This is the date on which a company’s board of directors declares that a dividend will be paid. The board determines the amount of the dividend, as well as when it is to be paid to shareholders of record.
• Record Date: This is the date on which a company reviews its books to determine its shareholders of record. Shareholders who hold a particular stock on this date will receive the firm’s dividend payment.
• Ex-Dividend Date: After the Record Date has been determined, the stock exchanges or the National Association of Securities Dealers (NASD) assign the ex-dividend date. The ex-dividend date for stocks is typically two business days prior to the record date. If an investor buys a stock before the ex-dividend date, then he or she will receive the dividend payment. If an investor purchases the stock on or after the ex-dividend date, then he or she is not entitled to receive the dividend.
2.1.2 Stock dividend payments:
For stock dividends, the value of the newly distributed shares is subtracted from, retained earnings and added to the firm’s capital account. This yields what will be referred to as ‘the retained earnings hypothesis’. If the firm faces legal restrictions, stock exchange rules, or has bond covenants written in terms of retained earnings,5 the additional shares can further restrict the firm’s ability to pay cash dividends. Firms that anticipate increased earnings will not expect the restrictions to be binding, and thus, will not find it costly to reduce retained earnings. However, firms that expect poor earnings in the future will expect the restrictions to be binding, making it costly to mimic the signals of higher-valued firms (Mark & Ronald, 1984).
2.1.3 Regular dividends
A regular cash dividend is a cash payment by a company to its shareholders at specified times of the year. Some companies pay dividends quarterly, others twice a year and some pay only once a year, a regular cash dividend is one of the best reasons to own stock because this dividend is like free money from the company that you own stock in. The company is basically paying you to own its stock. This a great deal (Multibagger, 2017).
2.1.4 special dividends
We study the stock market’s reaction to special dividends from mid-1962 (when CRSP “rst provides daily returns) through 1995. In special circumstances Company declares Special dividends. Generally company declares special dividend in case of abnormal profits.
2.2 DIVIDEND MODELS
The various models that support the above-submitted theories of
dividend relevance and irrelevance are as the following:
Modigliani Miller approach
According to (Maheshwari 1999 ) the price of a share of a firm is determined by its earning potentiality and investment policy and not by the pattern of income distribution. The model given by M&M the following:
Po = D1 + P1/ (1/Ke)
Where, Po = Prevailing market price of a share
Ke = Cost of equity capital
D1 = Dividend to be received at the end of period one
P1 = Market price of a share at the end of period one
According to the MM hypothesis, market value of a share before
dividend is declared is equal to the present value of dividends paid plus the market value of the share after dividend is declared.
Walter’s approach
According to Prof. James E. Walter, in the long run, share prices
reflect the present value of future+ dividends. According to him investment policy and dividend policy are inter related and the choice of a appropriate dividend policy affects the value of an enterprise. His formula for determination of expected market price of a share is as the following: (Ravi M Kishore)
P = (D + r/k(E-D)) / K
Where,
P = Market price of equity share
D = Dividend per share
E = Earnings per share
(E-D) = Retained earnings per share
r = Internal rate of return on investment
k = cost of capital
Gordon’s approach
The value of a share, like any other financial asset, is the present value of the future cash flows associated with ownership. On this view, the value of the share is calculated as the present value of an infinite stream of dividends.
Myron Gordon’s Dividend Growth Model explains how dividend
policy of a firm is a basis of establishing share value. Gordon’s model uses the dividend capitalization approach for stock valuation. The formula used is as the following: (Prasanna Chandra)
Po = (E1 (1-b)) / (K-br )
Where,
Po = price per share at the end of year 0
E1 = earnings per share at the end of year 1
(1-b) = fraction of earnings the firm distributes by way of dividends
b = fraction of earnings the firm ploughs back
k = rate of return required by shareholders
r = rate of return earned on investments made by the firm
br = growth rate of dividend and earnings
The models, provided by Walter and Gordon lead to the following
implications:
If r > k Price per share increases as dividend payout ratio decreases
If r = k Price per share remains unchanged with changes in dividend
payout ratio
If r < k Price per share increases as dividend payout ratio increases.
2.3 Dividend Policy Theories
2.3.1 Full information models—the tax factor
In later research, Modigliani (1982) finds that the clientele effect is responsible for only nominal alterations in portfolio composition rather than the major differences predicted by Miller (1977). Masulis and Trueman (1988) model cash dividend payments as products of deferred dividend costs. Their model predicts that investors with differing tax liabilities will not be uniform in their ideal firm investment/dividend policy. Tax-adjusted models are criticized as incompatible with rational behavior; this criticism prompts Miller (1986) to suggest a strategy of tax sheltering of income by high-tax-bracket individuals. Individuals can refrain, of course, from purchasing dividend-paying shares to avoid the tax liability of these payments. Alternatively, using a strategy first advanced by Miller and Scholes (1978), shareholders can purchase dividend-paying stocks and receive the distributions, then simultaneously borrow funds to invest in tax-free securities.
2.3.2 Models of information asymmetries
one os the model is Signaling models as Ofer and Thakor (1987), Rodriguez (1992), Talmor (1981), and many others offer signaling models of corporate dividend policy. The proponents of signaling theories believe that a corporate dividend policy used as a means of putting the message of quality across has a lower cost than other alternatives.3 The use of dividends as signals implies that alternative methods of signaling are not perfect substitutes (Asquith & Mullins, 1986) . The other model is Agency cost which Adam Smith (2010) adjudged the management of early joint stock companies to be negligent in many of their activities.
1. Agency cost:
Agency costs are lower in firms with high managerial ownership stakes because of the better alignment of shareholder and manager goals (Jensen & Meckling, 1976) and in firms with large block shareholders that are better able to monitor managerial activities (Shleifer & Vishney, 1986). In firms where dividend payouts are limited by bondholder covenants, dividend payout levels are still below the maximum level allowed by the constraints (Kalay, 1982).
Agency problems: Agency problems result from information asymmetries, potential wealth transfers from bondholders to stockholders through the acceptance of high-risk and -return projects by managers, and failure to accept positive net present value projects and perquisite consumption in excess of the level consumed by prudent corporate managers (Barnea, Haugen, & Senbet, 1981).
2. The free cash flow hypothesis
best interests should invest in profitable opportunities is shareholders The inefficient use of funds in excess of profitable investment opportunities by management was first recognized by Berle and Means (1932). Jensen’s (1992) free cash flow hypothesis updated this assertion, combining market information asymmetries with agency theory, but the free cash flow hypothesis does a better job of rationalizing the corporate takeover frenzy of the 1980s (Myers, 1987, 1990) than it does of providing a comprehensive and observable dividend policy.
2.3.3 Behavioral models
According to Shiller (1990), including these influences in modeling efforts can enrich the development of a theory to explain the endurance of corporate dividend policy. Managers, realizing that shareholders desire dividends, pay or increase dividends to mollify investors (Frankfurter & Lane, 1992). Dividend payments to shareholders should help increase the corporation’s stability by serving as a ritualistic reminder of the managerial and owner relationship (Ho & Robinson, 2010). As Frankfurter and Lane (1992) contend, dividends are partially a tradition and partially a method to allay investor anxiety.
Theoretical behavioral models:
Shefrin and Statman (1984) explain dividend preference by using the theory of self-control (Thaler & Shefrin, 1981) and the descriptive theory of choice under uncertainty (Kahneman & Tversky, 1982). Information models are used to justify the presence of corporate dividends while the tax liability of dividends is used as a counterargument. This model is also consistent with dividend clienteles.
3. Dividend fundamentals :
The expected cash dividends distribution is the main factor on which shareholders and investors depend to assess the price of the company’s shares in the market. These distributions represent one of the sources of cash flows to shareholders and provide them with information about the company’s current and future performance. Because retained earnings, profits not distributed to shareholders, are one of the forms of internal financing sources, the decision to distribute profits significantly affects the company’s external financing needs. In other words, if the company needs funding, the dividend will mean that there is a need for external financing by borrowing or selling preference or common shares.
3.1 cash dividend payment procedures :
When and how much cash dividends will be paid to shareholders in the company is a decision taken by the board of directors at their annual, semi-annual or quarterly meeting . The performance of the previous financial company, the previous cash dividends and the future of the company are the main factors that affect the Board of Directors’ decision regarding the dividends. The payment date, if the dividends are announced, must be determined. These procedures may vary from country to country.
3.2 Amount of dividend :
The decision to determine the amount or amount of dividends is a very important decision and depends on the policy of distribution of profits in the company. Most companies have a specific policy to follow in terms of the amount of dividends, but the board of directors can change this amount, based on the increase or decrease in profits achieved by the company.
3.3 Dividend dates :
the board of directors of the company announces the dividends, they often issue a declaration stating the decision to distribute profits, the deadline for names of shareholders registered in the company’s records and who are entitled to these distributions, and the date of payment. This announcement is usually published in newspapers and newspapers that specialize in financial news .
3.4 Record date :
All persons registered on the date of registration, which shall be established by the Board of Directors, shall receive dividends declared in a specified period in the future.Due to the company’s need for time to complete its records to transfer the ownership of the traded shares and the owners are entitled to receive dividends, the registration date of the stock begins two working days before the date of registration ( Ex –Dividend date ). This date is called the date of loss of the right of dividends distributed in the stock. The purchase of shares on the same date of the right of loss of dividends means that the shareholder does not receive dividends. The easiest way to get the first date of the right to lose profits is simply to put two days from the date of registration, or to offer four days if the weekend breaks. While market volatility is generally ignored, the share price is expected to fall in the amount of dividends declared on the date of loss of the right to dividends.
3.5 Payment date :
The day of payment is also by the Board of Directors, which is the actual day that the Company begins to pay the dividends of registered shareholders on the date of registration. It usually three to four weeks after the registration date.
3.6 Dividend reinvestment plans :
Many international companies today are offering to their shareholders plans to reinvest their dividend, which enables shareholders to invest their dividends from acquiring additional shares without incurring transaction costs . They have presented the date of record as the day on which an investor must own shares in order to receive the dividend payment . on that date of record, ownership books of corporation are closed, and stockholders whose name appears on that date are entitled to receive a dividend, and the Ex-dividend date as a period of two trading days prior to the date of record ,because the settlement date for a stock purchased in three working days after the transaction . the purchaser , who purchases stock after the date of record ,will not receive a dividend and the price of such a stock traded is called the Ex-dividend price. in the other hand they said that the distribution date is the date on which a dividend is paid to the stock holders. The distribution date may be several weeks after the date of record because the company must determine who the owner of the stock is on the date of record.
Also they have mentioned the advantages of dividend reinvestment plan, for the investors its automatic in most cases, he do not receive dividend in cash as proceeds of the cash dividend are automatically re-invested. If an investor lacks the discipline required to save ,such forced saving may help the investor to accumulate shares. The normal cost of reinvestment to procure additional shares is free or very low, which is beneficial to small investors. For the firm side the goodwill is achieved by providing another service for its stockholders, the reinvestment of dividend help to raise new equity capital for the firm, the automatic flow of new equity by reinvestment of dividends reduces the need for selling shares through underwriters, and as dividends are reinvested there is no immediate outflow of cash for the firm.
4. The relevance of dividends policy :
There are many theories and scientific findings regarding the policy of distribution of profits and although this research has provided a lot about the policy of distribution of profits, but the decisions of the financial structure and the budget is more important than the distribution of profits In other words, the investment policy is more important than the dividends.There are different views regarding the relationship between the value of a stock in the market and the dividends.while one of thought opines that dividend has an impact on the value of the firm, another one argues that the amount of dividend paid has no effect on the valuation of firm
The first point of view of thought refers to the Relevance of dividend while the other one relates to the Irrelevance of dividend
There are many theories regarding the policy of dividend distribution:
4.1 The residual theory of dividends
The theory of the remaining profits is one of the schools of thought that propose that the company should not distribute dividends to shareholders until after it has financed all the investment projects of the company.
This means that the company should distribute the profits from the remaining funds of the company’s investments.
That mean under this policy, dividends are paid out of earnings not needed to finance new acceptable capital projects. The dividends will fluctuate depending on investment opportunities available to the company
4.2 argument for dividend irrelevance:
The theory of the remaining dividend includes that if the company is unable to invest in its profits, its shares will distribute all the profits it has made to the shareholders in the company.This theory suggests that dividend distributions represent the remaining profits and not an effective decision that affects the market value of the companyHowever, some studies have shown that a significant change in dividends affects the company’s share in the profit market.The increase in dividends will result in an increase in the share price and a decrease in the dividend distribution resulting in a decrease in the share price.There are studies supporting this theory such as(Dividend Irrelevancy Theory, (Miller & Modigliani, 1961):(1)The dividend irrelevancy theory asserts that dividend policy has no effect on either the price of the firm or its cost of capital.Dividend policy does not affect share price because the value of the firm is a function of its earning power and the risk of its assets. If dividends do affect value, it is only due to: a) Information effect : The informational content of dividends relative to management’s earnings expectations ,b) Clientele effect: A clientele effect exists which allows firms to attract shareholders whose dividend preferences match the firm’s historical dividend payout patterns
4.3 Arguments for dividend relevance:
The main contribution on the theory of appropriateness of dividend distribution was made by Lintner Gorden (1963) ,Who suggested that there was a direct relationship between the company’s dividend distribution policy and market value.The bottom line of the theory is like a bird in hand, which suggests that investors see current dividends less risk of future dividend distributions.The current dividend distinguishes the uncertainty of investors, which makes them deduct the profits of the company at a lower discount rate and thus increase the share price of the company in the market.
Although many empirical studies attempted to prove the theory of appropriateness of profit distribution, none of these studies succeeded in providing a definitive evidence to support this theory.In practical life, financial managers and shareholders with the policy of dividend distribution affect the share price of the company in the market
4.3.1 The Bird in the Hand Theory (John Lintner and Myron Gordon)
The essence of this theory is not stockholders are risk averse and prefer current dividends due to their lower level of risk as compared to future dividends. Dividend payments reduce investor uncertainty and thereby increase stock value. This theory is based on the logic that ‘ what is available at present is preferable to what may be available in the future’. Investors would prefer to have a sure dividend now rather than a promised dividend in the future (even if the promised dividend is larger). Hence dividend policy is relevant and does affect the share price of a firm.
5. Factors affecting Dividend Policy
Dividend decision, one of the important aspects of firm’s financial policy, is not an independent decision. Rather, it is a decision that is taken after considering the various related aspects and factors. There are various factors influencing a firm’s dividend policy. For example, some studies suggest that dividend policy plays an important role in determining firm capital structure and agency costs. Many studies have provided arguments that link agency costs with the other financial activities of a firm.
Easterbrook (1984) argued that firms pay out dividends in order to reduce agency costs. Dividend payout keeps firms in the capital market, where monitoring of managers is available at lower cost. If a firm has free cash flows, it is better to share them with shareholders in the form of dividend in order to reduce the possibility of these funds being wasted on unprofitable (negative net present value) projects Jensen,( 1986)
Dividend policy of a firm sets the guidelines to be followed while deciding the amount of dividend to be paid out to the shareholders. The firm needs to commit to the dividend policy while deciding the proportion of earnings to be distributed and the frequency of this distribution. And there are different factors that affect dividend policy as the following:
1. Legal Provisions: for any company, there is no legal regulations to distribute dividend, however there some conditions by law regarding to the way the firm should distribute its dividend, and there are three rules related to dividend payments as below:
– Net profit rule: if the firm is in profit during the year, it pay dividend, but if it’s not, then it does not pay dividend.
– Capital Impairment rule: firm can’t pay dividend out of its paid capital, because this is affecting the equity of itself.
– Insolvency rule: if the firm total asset is less than its total liability then it can’t pay dividend.
2. Magnitude of Earnings: Another important aspect of dividend policy is the extent of firm’s earnings. It serves as the introductory point for framing the dividend policy. This is so because a firm can pay dividends either from the current year’s profit or the past year’s profit. So, if the profits of a company increase, it will directly influence the dividend declaration as the latter may also increase. Thus, the dividend is directly linked with the availability of the earnings with the company.
3. Desire of Shareholders: Although, legally, the discretion as to whether to declare dividend or not has been left with the Board of Directors, the directors should give the importance to the desires of shareholders in the declaration of dividends as they are the representatives of shareholders. Desires of shareholders for dividends depend upon their economic status.
Investors, such as retired persons, widows and other economically weaker persons view dividends as a source of funds to meet their day-to-day living expenses. To benefit such investors, the companies should pay regular dividends. On the other hand, a wealthy investor in a high income tax bracket may not benefit by high current dividend incomes.
4. Type of Industry: The nature of the industry to which the firm belongs has an important effect on the dividend policy. Industries where earnings are stable, as certain industries have a steady and stable demand irrespective of the prevailing economic conditions. For instance, people used to drink coffee both on daily basis as well as in holidays. Such firms expect regular earnings and hence can follow a consistent dividend policy. On the other hand, if the earnings are uncertain, as in the case of luxury goods, conservative policy should be followed. Such firms should retain a substantial part of their current earnings during prosperous period in order to provide funds to pay proper dividends in the recession periods.
Thus, industries with steady demand of their products can follow a higher dividend payout ratio while cyclical industries should follow a lower payout ratio.
5. Age of the firm: The age of the firm also influences the dividend decision of a firm. A newly established one has concern to limit payment of dividend and retain substantial part of earnings for financing its future growth and development, while older firms which have established sufficient reserves can afford to pay liberal dividends. Grullon et al. (2002) suggested that as firms mature, they experience a contraction in their growth which results in a decline in their capital expenditures.
6. Taxation Policy: The tax policy of a country also influences the dividend policy of a company. The rate of tax directly influences the amount of profits available to the company for declaring dividends.
7. Control Factor: Yet another factor determining dividend policy is the threat to lose control. If a company declares high rate of dividend, then there is the possibility that a company may face liquidity crunch for which it has to issue new shares, resulting in dilution of control.
8. Liquidity Position: The dividend policy of a firm is also influenced by the availability of liquid resources. Although, a firm may have sufficient available profits to declare dividends, yet it may not be desirable to pay dividends if it does not have sufficient liquid resources. Hence the liquidity position of a company is an important consideration in paying dividends.
If a company does not have liquid resources, it is better to declare stock-dividend issue of bonus shares to the existing shareholders. The issue of bonus shares also amounts to distribution of firm’s earnings among the existing shareholders without affecting its cash position.
9. Future financial Requirements: A firm while faming dividend policy should also consider its future plans. If it foresees some profitable investment opportunities in near future then it may go for lower dividend.
10. Business Risk: Business risk is a potential factor that may affect dividend policy. High levels of business risk make the relationship between current and expected future profitability less certain. Consequently, it is expected that firms with higher levels of business risk will have lower dividend payments. Many researchers argued that the uncertainty of a firm’s earnings may lead it to pay lower dividends because volatile earnings materially increase the risk of default. In addition, field studies using survey data (e.g., Lintner, 1956) reported compelling evidence that risk can affect dividend policy. In these surveys, managers explicitly cited risk as a factor that influences their dividend choice.
11. Inflation: Inflation acts as a constraint in the payment of dividends. Profits as arrived from the profit and loss account on the basis of historical cost have a tendency to be overstated in times of rise in prices due to over valuation of stock-in-trade and writing off depreciation on fixed assets at lower rates. As a result, when prices rise, funds generated by depreciation would not be adequate to replace fixed assets, and hence to maintain the same assets and capital intact, substantial part of the current earnings would be retained.
Otherwise, imaginary and inflated book profits in the days of rising prices would amount to payment of dividends much more than warranted by the real profits, out of the equity capital resulting in erosion of capital E. Powell., (2001)
6. Dividend distribution types :
Dividends are distributed from the balance of retained earnings or profit earned during the period. The management of the company makes a distinction between these forms according to the company’s conditions and objectives. Distributions take different forms.
1- Cash dividends:
Companies often distribute dividends to shareholders in the form of cash. The shareholder’s right to profit arises after the shareholders’ decision to distribute profit (on the day of announcing the distributions). The right of the shareholders registered in the company’s records is on the date of the General Assembly meeting.The distribution of cash dividends to shareholders prior to the preparation of the financial statements is an obligation to be reflected in the statement of financial position.The laws of companies in some countries allow the distribution of profits once every year or every half a year or quarter on a regular or irregular basis and distributions depend on the existence of profits and availability of cash at the company and the need for strategic plans to manage cash Or affect the share price or investor opinion.
2 – Distributions in kind :
Sometimes, when the cash is not available, the Board of Directors may propose, with the approval of the General Assembly of Shareholders, the distribution of profits in kind. The company distributes a specific product instead of cash in the sense of distributing the company from its assets.
3- Distribution of dividends in the form of shares:
the investor should be given shares in the cash dividend allowance. The distribution ratio should be determined according to the investor’s share of the shares. That means, do not change in investor’s number of shares. On other hand ,this form leads to decrease in the market value of the shares, increase in the number of shares constituting the capital and decrease in earnings per share. This type of distribution is a restructuring of capital and is not considered a real distribution.
Some companies prefer to distribute periodic profits in the form of shares for the following reasons:
1. Increasing the number of shares traded in the financial markets, leading to a decrease in the share price and then increases the dealing in.
2.Lack of sufficient liquidity and cash.
3.The existence of retained earnings and the desire of the management to transfer some of them to the capital account.
7. Stock Option
A stock option is a privilege, sold by one party to another that gives the buyer the right but not the obligation, to buy or sell a stock at an agreed price within a fixed period of time.The stock option contract is between two consenting parties, and the options normally represent 100 shares of an underlying stock.
7.1 Option Contract Specifications: the following terms are specified in an option contract
1) Option Type
The two types of stock options are puts and calls. Call options confers the buyer the right to buy the underlying stock while put options give him the rights to sell them.
2) Call Option
A call option is an option contract in which the holder (buyer) has the right (but not the obligation) to buy a specified quantity of a security at a specified price (strike price) within a fixed period of time (until its expiration).For the writer (seller) of a call option, it represents an obligation to sell the underlying security at the strike price if the option is exercised. The call option writer is paid a premium for taking on the risk associated with the obligation. For stock options, each contract covers 100 shares.