MINI REPORT - I

“FINANCIAL MANAGEMENT”
ON
“DIVIDEND POLICY AND DIVIDEND VALUATION”
A Mini Report submitted to Jawaharlal Nehru Technological University.
Kakinada in the partial fulfillment for the award of degree of
MASTER OF BUSINESS ADMINISTRATION

Submitted by

MAKKENA YASWANTH KUMAR

24KQ1E0094

Under the esteemed guidance of

P.NARESH
Assistant professor

2025-2026

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 CERTIFICATE
This is to certify that the mini project titled “DIVIDEND POLICY AND DIVIDEND
VALUATION” with reference to “FINANCIAL MANAGEMENT” is a bonafide work
of MAKKENA YASWANTH KUMAR Reg. no: 24KQ1E0094 in partial fulfillment
for the award of degree Master of Business Administration by J.N.T.U. Kakinada.

Student Signature faculty Signature

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CONTENTS

S. No Topic Page No

1 Introduction 4

2 Meaning and Importance of Dividend Policy 4

3 Factors Influencing Dividend Policy 5

4 Types of Dividend Policy 5

5 Theories of Dividend Policy 6

6 Dividend Valuation Models 8

7 Practical Application and Case Study 9

8 Advantages and Limitations 9

9 Conclusion and Future Scope 10

10 References 11

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1. INTRODUCTION
Dividends are a portion of a company’s earnings distributed
to shareholders. The decision of how much profit to
distribute and how much to retain is referred to as the
dividend policy. This decision is central to financial
management as it directly impacts investor satisfaction,
share price, and company growth.
Dividend policy and valuation play a crucial role in defining
the financial strategy of a firm and its market perception.
An optimal dividend policy seeks to maximize shareholder
wealth without compromising the firm’s investment needs.

2. MEANING AND IMPORTANCE OF DIVIDEND POLICY

Dividend policy refers to the guidelines a company uses to
decide how much of its earnings will be paid out as
dividends versus how much will be retained for
reinvestment.
Importance:
• Affects investor perception and share valuation
• Provides regular income to shareholders
• Impacts firm’s retained earnings and growth
• Serves as a signaling tool about company performance

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3. FACTORS INFLUENCING DIVIDEND POLICY
1. Profitability – Only profitable firms can declare
dividends.
2. Liquidity Position – Dividends are paid in cash, so
liquidity is crucial.
3. Access to Capital Markets – Firms with easy capital
access may pay more dividends.
4. Legal Restrictions – Companies must comply with laws
and regulations.
5. Shareholder Preferences – Some investors prefer
regular income; others prefer capital gains.
6. Tax Considerations – Tax policy influences whether
dividends or reinvestment is more beneficial.
7. Control Considerations – Retained earnings avoid
dilution of ownership.

4. TYPES OF DIVIDEND POLICY

1. Stable Dividend Policy
o A fixed amount or a constant percentage of
earnings is paid regularly.
o Preferred by conservative investors.
2. Constant Payout Ratio

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 o A fixed percentage of earnings is paid as
dividends.
o Dividend fluctuates with earnings.
3. Residual Dividend Policy
o Dividends are paid from leftover earnings after
funding investments.
o Prioritizes growth over income.
4. Irregular Dividend Policy
o No fixed pattern or commitment to pay dividends.
o Depends on profits, projects, and market
conditions.

5. THEORIES OF DIVIDEND POLICY

Dividend policy has been subject to various theoretical
perspectives in financial literature:
A. Walter’s Model
This model suggests that the dividend decision is relevant
and affects the value of the firm.
P=D+(r/E)(E−D)kP = \frac{D + (r/E)(E - D)}{k}P=kD+(r/E)(E−D)
Where:
• P = Price per share

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 • D = Dividend per share
• E = Earnings per share
• r = Return on investment
• k = Cost of capital
If r > k: Retain earnings
If r < k: Pay dividends
B. Gordon’s Model (Bird-in-the-Hand Theory)
This model also suggests relevance of dividend policy.
Investors prefer the certainty of dividends over uncertain
capital gains.
P=D1k−gP = \frac{D_1}{k - g}P=k−gD1
Where:
• D₁ = Dividend expected next year
• k = Cost of capital
• g = Growth rate
C. Modigliani and Miller (M-M) Hypothesis
This theory states that dividend policy is irrelevant in a
perfect capital market. Shareholder wealth is unaffected by
dividend decision.
Assumptions:
• No taxes

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 • No transaction costs
• Rational investors
• No flotation costs
Criticism: Unrealistic assumptions reduce practical
relevance.

6. DIVIDEND VALUATION MODELS

Dividend valuation models are used to estimate the intrinsic
value of a stock based on expected dividends.
A. Dividend Discount Model (DDM)
Used to calculate the present value of all expected future
dividends.
P0=∑t=1∞Dt(1+k)tP_0 = \sum_{t=1}^{\infty} \frac{D_t}{(1 +
k)^t}P0=t=1∑∞(1+k)tDt
If dividends are constant and grow at a constant rate, we
use:
P0=D1k−gP_0 = \frac{D_1}{k - g}P0=k−gD1
B. Two-Stage Dividend Model
• Assumes high dividend growth for a few years, then
stabilizes.
• Useful for valuing new firms with high growth.

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7. PRACTICAL APPLICATION AND CASE STUDY
Example:
Infosys Ltd., a large Indian IT company, follows a consistent
dividend policy. It pays out a portion of profits as dividends
and retains the rest for business growth. Over the years,
Infosys' stable dividends have helped enhance investor trust
and reduce share price volatility.
Real-World Impacts:
• Companies like Apple resumed paying dividends after
years, signaling strong cash flows.
• In contrast, Amazon and Tesla reinvest all earnings into
growth, reflecting a residual dividend policy.

8. ADVANTAGES AND LIMITATIONS

Advantages:
• Enhances shareholder satisfaction
• Builds investor confidence and market reputation
• Reduces agency costs by distributing excess cash
• Acts as a performance indicator
Limitations:

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 • Reduces funds available for reinvestment
• May lead to market pressure to maintain dividend
levels
• Difficult to change policy without affecting stock price
• Heavily influenced by market and tax structures

9. CONCLUSION AND FUTURE SCOPE

Dividend policy is a critical financial decision with long-term
implications on firm value, investor perception, and market
stability. There is no one-size-fits-all approach; companies
must balance growth needs with shareholder expectations.
Future Scope:
• Use of AI and financial analytics in determining optimal
payout strategies.
• Shift toward dividend reinvestment plans (DRIPs) and
flexible payout models.
• Growing focus on ESG-linked dividends and
performance-based payouts.
• Role of dividend policy in sustainable finance and
capital allocation efficiency.

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10. REFERENCES
1. Pandey, I.M. – Financial Management
2. Khan & Jain – Financial Management: Text, Problems
and Cases
3. Modigliani, F., & Miller, M. – Dividend Policy and
Valuation of the Firm
4. Gordon, M.J. – Dividends, Earnings and Stock Prices
5. Annual Reports – Infosys, TCS, HUL
6. Journal of Finance – Wiley Publications
7. NSE & BSE Market Data

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