Impact of Dividend Policy on Capital Structure

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(A report submitted towards the partial fulfillment of the requirement of the two years full-time Post Graduate Diploma in Management.)


I, student of Post Graduate Diploma in Management from hereby declare that I have completed dissertation on “IMPACT OF DIVIDEND POLICY ON CAPITAL STRUCTURE ” a part of the course requirement.

I further declare that the information presented in this project is true and original to the best of my knowledge.


It gives me immense pleasure to report successful completion of my dissertation entitled


It is my great privilege to express deep sense of gratitude to my faculty mentor for his sincere efforts, valuable guidance, amicable assistance and inspiration for the completion of my dissertation report.

Last but not the least, I wish to thanks GOD, and parents, as it was their blessings that it was able to conclude this dissertation report.


1) Introduction 5

2) Management of Profits 8-14

Meaning of Management of Earnings

• Dividend Policy

Factors Determining Dividend Policy

• Types Of Dividend Policies

Limitations of Stable Dividend Policy

3) Factors Influencing Dividend Policy 14-36

4) Forms of Dividends -

5) Reasons or Objectives for Issuing the Stock Dividend -

• Stock Dividend (Bonus Share) and Stock Splits (Shares)

6) Research Objectives and Methodology 36 • Objective
• Methodology

7) Findings & Analysis 40

8) Conclusion 45-52

9) Bibliography 53

From the practitioners’ viewpoint, dividend policy of a firm has implications for investors, managers and lenders and other stakeholders. For investors, dividends – whether declared today or accumulated and provided at a later date - are not only a means of regular income, but also an important input in valuation of a firm. Similarly, managers’ flexibility to invest in projects is also dependent on the amount of dividend that they can offer to shareholders as more dividends may mean fewer funds available for investment. Lenders may also have interest in the amount of dividend a firm declares, as more the dividend paid less would be the amount available for servicing and redemption of their claims. However, in a perfect world as Modigliani and Miller (1961) have shown, investors may be indifferent about the amount of dividend as it has no influence on the value of a firm. Any investor can create a ‘home made dividend’ if required or can invest the proceeds of a dividend payment in additional shares as and when a company makes dividend payment. Similarly, managers may be indifferent as funds would be available or could be raised with out any flotation costs for all positive net present value projects. But in reality, dividends may matter, particularly in the context of differential tax treatment of dividends and capital gains. Very often dividends are taxed at a higher rate compared to capital gains. This implies that dividends may have negative consequences for investors. Similarly, cost of raising funds is not insignificant and may well lead to lower payout, particularly when positive net present value projects are available. Apart from flotation costs, information asymmetry between managers and outside investors may also have implications for dividend policy. According to Myers and Majluf (1984), in the presence of information asymmetry and flotation costs, investment decisions made by managers are subject to the pecking...
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