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. $everal proposals for e%panding the production of e%isting plant and installation of a new plan to manufacture a new line of chemicals are currently under consideration. Company&s cost of euity is '6( while its debt cost is '2(. It corporation ta% rate is around )*(. The e%pansion programs are e%pected to improve the company&s overall return on capital employed due to economies of scale.
INTRODUCTION OF DI!IDEND a sum of money paid regularly +typically annually, by a company to its shareholders out of its profits +or reserves,
Definition of 'Dividend' A share share of of the after-tax profit profit of of a company, distributed to its shareholders shareholders according according to the number and class of shares held held by by them. Smaller companies companies typically typically distribute dividends at the end of an accounting accounting year, year, whereas larger, publicly held companies usually distribute it every quarter. The amount amount and and timing of the dividend is decided by the board of directors, directors, who also determine whether whether it is paid out of current earnings earnings or or the past earnings kept as reserve. olders of preferred stock receive receive dividend dividend at a fixed rate and rate and are paid first. olders of ordinary shares are shares are entitled entitled to to receive any amount of dividend, based on the level of profit and the company!s need need for for cash cash for for expansion or other purposes. "orporate legislation generally legislation generally forbids payment of dividend out of anticipated but not yet received #unreali$ed # unreali$ed%% profit. &ormally all dividend payments payments are are taxable, often at the source source..
Company’s
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 i s 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 2623 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 depe nding 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
