Dividend Policy

Stability of dividend policy. There may be three types of dividend policy (1)Strict or Conservative dividend Policy which envisages the retention of profits on the cost of dividend pay-out. It helps in strengthening the financial position of the company; (2) Lenient Dividend Policy which views the payment of dividend at the maximum rate possible taking in view the current earing of the company. Under such policy company retains the minimum possible earnings; (3)Stable Dividend Policy suggests a mid-way of the above two views. Under this policy, stable or almost stable rate of dividend is maintained.Company maintains reserves in the years of prosperity and uses them in paying dividend in lean year. If company follows stable dividend policy, the market price of tis shares shall be higher. There are reasons why investors prefer stable dividend policy. Main reasons are:- 1. Confidence Among Shareholders. A regular and stable dividend payment may serve to resolve uncertainty in the minds of shareholders. The company resorts not to cut the dividend rate even if its profits are lower. It maintains the rate of dividends by appropriating the funds from its reserves.Stable dividend presents a bright future of the company and thus gains the confidence of the shareholders an the goodwill of the company increases in the eyes of the general investors. 2. Income Conscious Investors. The second factor favoring stable dividend policy is that some investors are income conscious and favor a stable rate of dividend. They too, never favour an unstable rte of dividend. A Stable dividend policy may also satisfy such investors. 3. Stability in Market Price of Shares. Other things beings equal, the market price very with the rate of dividend the company declares on its equity shares.The value of shares of a company having a stable dividend policy fluctuates not widely even if the earnings of the company turn down. Thus, this policy buffer the market price of the stock. 4. Encouragement to Institutional Investors. A stable dividend policy attracts investments from institutional investors such institutional investors generally prepare a list of securities, mainly incorporating the securities of the companies having stable dividend policy in which they invest their surpluses or their long term funds such as pensions or provident funds etc.In this way, stability and regularity of dividends not only affects the market price of shares but also increases the general credit of the company that pays the company in the long run. Factors Affecting Dividend Policy A number of considerations affect the dividend policy of company. The major factors are 1. Stability of Earnings. The nature of business has an important bearing on the dividend policy. Industrial units having stability of earnings may formulate a more consistent dividend policy than those having an uneven flow of incomes because they can predict easily their savings and earnings.Usually, enterprises dealing in nec essities suffer less from oscillating earnings than those dealing in luxuries or fancy goods. 2. Age of corporation. Age of the corporation counts much in deciding the dividend policy. A newly established company may require much of its earnings for expansion and plant improvement and may adopt a rigid dividend policy while, on the other hand, an older company can formulate a clear cut and more consistent policy regarding dividend. 3. Liquidity of Funds.Availability of cash and sound financial position is also an important factor in dividend decisions. A dividend represents a cash outflow, the greater the funds and the liquidity of the firm the better the ability to pay dividend. The liquidity of a firm depends very much on the investment and financial decisions of the firm which in turn determines the rate of expansion and the manner of financing. If cash position is weak, stock dividend will be distributed and if cash position is good, company can distribute the cash dividend. 4. Extent of share Distribution.Nature of ownership also affects the dividend decisions. A closely held company is likely to get the assent of the shareholders for the suspension of dividend or for following a conservative dividend policy. On the other hand, a company having a good number of shareholders widely distributed and forming low or medium income group, would face a great difficulty in securing such assent because they will emphasise to distribute higher dividend. 5. Needs for Additional Capital. Companies retain a part of their profits for strengthening their financial position.The income may be conserved for meeting the increased requirements of working capital or of future expansion. Small companies usually find difficulties in raising finance for their needs of increased working capital for expansion programmes. They having no other alternative, use their ploughed back profits. Thus, such Companies distribute dividend at low rates and retain a big part of profits. 6. Trade Cycles. Business cycles also exercise influence upon dividend Policy. Dividend policy is adjusted according to the business oscillations.During the boom, prudent management creates food reserves for contingencies which follow the inflationary period. Higher rates of dividend can be used as a tool for marketing the securities in an otherwise depressed market. The financial solvency can be proved and maintained by the companies in dull years if the adequate reserves have been built up. 7. Government Policies. The earnings capacity of the enterprise is widely affected by the change in fiscal, industrial, labour, control and other government policies.Sometimes government restricts the distribution of dividend beyond a certain percentage in a particular industry or in all spheres of business activity as was done in emergency. The dividend policy has to be modified or formulated accordingly in those enterprises. 8. Taxation Policy. High taxation reduces the earnings of he companies and c onsequently the rate of dividend is lowered down. Sometimes government levies dividend-tax of distribution of dividend beyond a certain limit. It also affects the capital formation. N India, dividends beyond 10 % of aid-up capital are subject to dividend tax at 7. 5 %. 9. Legal Requirements. In deciding on the dividend, the directors take the legal requirements too into consideration. In order to protect the interests of creditors an outsiders, the companies Act 1956 prescribes certain guidelines in respect of the distribution and payment of dividend. Moreover, a company is required to provide for depreciation on its fixed and tangible assets before declaring dividend on shares. It proposes that Dividend should not be distributed out of capita, in any case.Likewise, contractual obligation should also be fulfilled, for example, payment of dividend on preference shares in priority over ordinary dividend. 10. Past dividend Rates. While formulating the Dividend Policy, the directors mus t keep in mind the dividend paid in past years. The current rate should be around the average past rat. If it has been abnormally increased the shares will be subjected to speculation. In a new concern, the company should consider the dividend policy of the rival organisation. 11. Ability to Borrow.Well established and large firms have better access to the capital market than the new Companies and may borrow funds from the external sources if there arises any need. Such Companies may have a better dividend pay-out ratio. Whereas smaller firms have to depend on their internal sources and therefore they will have to built up good reserves by reducing the dividend pay out ratio for meeting any obligation requiring heavy funds. 12. Policy of Control. Policy of control is another determining factor is so far as dividends are concerned.If the directors want to have control on company, they would not like to add new shareholders and therefore, declare a dividend at low rate. Because by add ing new shareholders they fear dilution of control and diversion of policies and programmes of the existing management. So they prefer to meet the needs through retained earing. If the directors do not bother about the control of affairs they will follow a liberal dividend policy. Thus control is an influencing factor in framing the dividend policy. 13. Repayments of Loan. A company having loan indebtedness are vowed to a igh rate of retention earnings, unless one other arrangements are made for the redemption of debt on maturity. It will naturally lower down the rate of dividend. Sometimes, the lenders (mostly institutional lenders) put restrictions on the dividend distribution still such time their loan is outstanding. Formal loan contracts generally provide a certain standard of liquidity and solvency to be maintained. Management is bound to hour such restrictions and to limit the rate of dividend payout. 14. Time for Payment of Dividend. When should the dividend be paid is anoth er consideration.Payment of dividend means outflow of cash. It is, therefore, desirable to distribute dividend at a time when is least needed by the company because there are peak times as well as lean periods of expenditure. Wise management should plan the payment of dividend in such a manner that there is no cash outflow at a time when the undertaking is already in need of urgent finances. 15. Regularity and stability in Dividend Payment. Dividends should be paid regularly because each investor is interested in the regular payment of dividend.The management should, inspite of regular payment of dividend, consider that the rate of dividend should be all the most constant. For this purpose sometimes companies maintain dividend Meaning and Types of Dividend The profits of a company when made available for the distribution among its shareholders are called dividend. The dividend may be as a fixed annual percentage of paid up capital as in the case of preference shares or it may vary a ccording to the prosperity of the company as in the case of ordinary shares.The decision for distributing or paying a dividend is taken in the meeting of Board of Directors and in confirmed generally by the annual general meeting of the shareholders. The dividend can be declared only out of divisible profits, remained after setting of all the expenses, transferring the reasonable amount of profit to reserve fund and providing for depreciation and taxation for the year. It means if in any year, there is not profits, no dividend shall be distributed that year.The shareholders cannot insist upon the company to declared the dividend. It is solely the discretion of the directors. Aunt hinted that the dividend was an income of the owners of the corporation which they received in the capacity of the owner. Distribution of dividend involves reduction of current assets (cash) but not always. Stock dividend or bonus shares is an exception to it Basic Issues Involved in Dividend Policy There a re certain basic questions which are Involved in determining the sound dividend policy. Such questions are:- 1.Cost of Capital. Cost of capital is one of the considerations for taking a decision whether to distribute dividend or not. As decision making tool, the Board calculates the ratio of rupee profits that the business expects to earn (Ra) to the rupee, profits that the shareholders can expect to earn outside (Rc) i. e. , Rs. /Rc. If the ratio is less than one, it is a signal to distribute dividend and if it is more than one, the distribution of dividend will be discontinued. 2. realisation of Objectives. The main objectives of the firm i. e. maximization of wealth for shareholders including there current rate of dividend-should also be aimed at in formulating the dividend policy. 3. Shareholders' Group. Dividend policy affects the shareholders group. It means a company with low pay-out an heavy reinvestment attracts shareholders interested in capital gains rather than n current income whereas a company with high dividend pay-out attracts those who are interested in current income. 4. Release of Corporate earnings. Dividend distribution is taking as a mens of distributing unused funds.Dividend policy affects the shareholders wealth by varying its dividend pay = out ratio. In Dividend policy, the financial manager decides whether to release Corporate earnings or not. These are certain basic issues Involved in formulating a Dividend policy. Dividend policy to a large extent affects the financial structure, the flow of funds, liquidity, stock prices and in the last shareholders' satisfaction. That is why management exercises a high degree of judgment establishing a sound dividend pattern. Dividend Policy Dividend Policy Vinod Kothari Corporations earn profits – they do not distribute all of it. Part of profit is ploughed back or held back as retained earnings. Part of the profit gets distributed to the shareholders. The part that is distributed is the dividend. The ratio of the actual distribution or dividend, and the total distributable profits, is called dividend payout ratio. How much of its profits should a corporation distribute? There are several considerations that apply in answering this question. Hence, companies have to frame and work on a definitive policy of dividend payout ratio.Of course, no corporate management can afford to stick to a fixed dividend payout ratio year after year – neither is such fixity of dividend payout ratio required or expected. However, management has to broadly decide its policy on its broad attitude towards distribution – liberal dividend payout ratio, or conservative dividend payout ratio, etc. If one were to ask this quest ion in context of debt sources of capital – for example, how much interest should a corporation pay to its bankers, the answer is straight forward. As interest paid is the cost of the borrowing, the lesser the interest a corporation pays, the better it is.Besides, companies do not have choice on paying of interest to lenders – as the rate of interest is contractually fixed. Rate of dividends may be fixed in case of preference shares too. However, in case of equity shares, there is no fixed rate of dividends. It cannot be said that the dividend paid is the cost of equity capital – if that was the case, corporations may try to minimize the dividend distribution. Hence, the following points emerge as regards the dividend distribution policy: †¢ The cost of equity is defined as the rate at which the corporation must earn on its equity to keep the market price of the equity shares constant.Let us further suppose that the market price of the shares is obtained by capitalizing the earnings of the corporation at a certain capitalization rate – the capitalization rate itself depending on the riskiness or beta of the industry. Suppose the corporation does not earn any profit. Shareholders were expecting a certain rate of return on their shareholding – hence, share prices will fall at the expected return on equity. On the other hand, if just the expected rate of return is earned by the corporation, the price of equity shares remains constant if the earnings are entirely distributed, and xactly grows by the expected rate of return if the earnings are entirely retained. The above discussion leads to the conclusion that the cost of equity is not the dividends but the return on equity – hence, a corporation cannot work on the objective of minimizing dividends. Equity shareholders are the owners of the corporation – hence, retained earnings ultimately belong to the shareholders. Supposing a company earns return on equity o f 10%, and retains the whole of it, the retained earnings increase the net asset value (NAV) of the equity shares exactly at the rate of 10%.Assuming there are no other factors affecting the equity price of the company, the market price of †¢ †¢ †¢ †¢ †¢ †¢ the shares should exactly go up by 10% commensurate with the increase in the NAV of the shares. That is to say, shareholders gain by way of appreciation in market price to the extent of 10%. On the other hand, if the company distributes the entire earnings, shareholders earn a cash return of 10%, and there is no impact on the NAV of the shares, hence, the same should remain unchanged.Therefore, in both the cases, the shareholders earned a return of 10% – in the first case, by way of growth or capital appreciation, and in the second case, by way of income. In other words, merely because the corporation is not distributing profits does not mean it is depriving shareholders of the rate of return on equity. The above two points reflect the indifference, sometimes referred to as irrelevance of dividend policy (see Modigliani and Miller approach later in this Chapter) from the viewpoint of either the company or its shareholders. Supposing the corporation decides to retain the entire earning.Obviously, the corporation would earn on this retained profit at the applicable return on equity. Note that the return on equity is relevant, as retained earnings would be leveraged and would, therefore, benefit from the impact of leverage too. On the other hand, if the corporation were to distribute the entire profits, shareholders reinvest/consume the income so distributed at their own rate of return. Hence, it may be contended that whether the company retains or distributes the earnings depends on whose reinvestment rate is higher – that of the company or that of the shareholders?Quite clearly, the rate of reinvestment in the hands of the corporation is higher than that in the han ds of the shareholders, (a) because of leverage which shareholders may not be able to garner; and (b) intuitively, that is the very reason for the shareholders to invest in the company in the first place. This argument generally favors retention of profits by the company rather than distribution. [As we discuss later, this argument is the basis of the Walter formula] As a counter argument to this, it is contended that shareholders do not need growth only – they need current income too.Many investors may sustain their livelihood on dividend earnings. Of what avail is the increase in market value of shares, if I need cash to spend for my expenses? However, in the age of demat securities and liquid stock markets, growth and income are almost equivalent. For example, if I am holding equity shares worth $ 100, which appreciate in value to $ 110 due to retention, I can dispose off 10/110% of my shareholding, earn cash equal to $ 10, and still be left with stock worth $ 100, which i s exactly the same as earning cash dividend of $ 10 with no retention at all.While the above argument may point to indifference between growth and income, the reality of the marketplace is that investors do have varying preferences for growth and income. There are investors who are growth-inclined, and there are those who are income-inclined. Majority of retail investors insist on balance between growth and income, as they do not see an exact equivalence between appreciation in market value and current cashflows. Hence, the conclusion that emerges is that companies do have to strike a balance between shareholders’ need for current income, and growth opportunities by retained earnings.Hence, dividend policy still remains an important consideration. While making the above points, there are certain special points that affect particular situation that need to be borne in mind: †¢ Company’s reinvestment rate lower than that of shareholders: Sometimes, there are compani es that do not have significant reinvestment opportunities. More precisely, we say the reinvestment rate of the company is lesser than the reinvestment rate of shareholders. In such cases, obviously, it is better to pay earnings out than to retain them.As the classic theories of impact of dividends on market value of a share (see Walter’s formula below) suggest, or what is anyway intuitively understandable, retention of earnings makes sense only where the reinvestment rate of the company is higher than that of shareholders. †¢ Tax disparities between current dividends and growth: In our discussion on indifference between current dividends and share price appreciation, we have assumed that taxes do not play a spoilsport. In fact, quite often, they do.For example, if a company distributes dividends, the same may be taxed (either as income in the hands of shareholders, or by way of tax on distribution – like dividend distribution tax in India). Alternatively, if the shareholders have a capital appreciation, which they encash by partial liquidation of holdings, shareholders have a capital gain. Taxability of a capital gain may not be the same as that of dividends. Hence, taxes may differentiate between current dividends and share price appreciation. Shares with fixed returns: Needless to say, there is no relevance of dividend policy where dividends are payable as per terms of issue – for example, in case of preference shares. †¢ Entities requiring minimum distribution: There might also be situations where entities are required to do a minimum distribution under regulations. For example, in case of real estate investment trusts, a certain minimum distribution is required to attain tax transparent status. There might be other regulations or regulatory motivations for companies to distribute their profits.These regulations may impact our discussion on relevance of dividend policy on price of equity shares. †¢ Unlisted companies: Fi nally, one must also note that discussion above on the parity between distributed earnings and retained earnings – the latter leading to market price appreciation – will have relevance only in case of listed firms. Technically speaking, in case of unlisted firms too, retained earnings belong to the shareholders, as shareholders after all are the owners of the residual wealth of the company. However, that residual ownership may be a myth as companies do not istribute assets except in event of winding, and winding up is a rarity. The discussion in this chapter on dividend policy, as far is relates to market price of equity shares, is keeping in mind listed firms. In case of unlisted firms, classical models such as Walter’s model or Gordon Growth model discussed below may hold relevance than market price-based models. From dividends to market value of equity: Dividend capitalisation approach: If, for a second, we were to ignore the stock market capitalisation of a company, what is the market value of an equity share?Say, we take the case of an unlisted company. We know from our discussion on present values that the value of any asset is the value of its cashflows. What is the cashflow a shareholder gets from his equity? As long as the company is not wound up, and the shareholder does not sell the stock, the only cashflow of the shareholder is the dividends he gets. It is easy to understand that if we are not envisaging either a sale of the shares or a liquidation of the company, then the stream of dividends may be assumed to continue in perpetuity. Hence, VE = ? ? (1 + K i =1 Di E )i (1)Where VE : Value of equity K E : Cost of equity Di : dividends in paid in year i Equation (1) is easy to understand. Shareholders continue to receive dividends year after year, and these dividends are discounted by the shareholders at the cost of equity, that is, the required return of the shareholders. If the stream of dividends is constant, then Equation (1) is actually a geometric progression. We can manipulate Equation (1) either to compute the price of equity, if the constant stream of dividends is known, or to compute the cost of equity, if the dividend rate and market price of the shares is known.Applying the geographical progression formula for adding up perpetual progressions, assuming constant dividends equal to D, Equation (1) above becomes: VE = = D (1 + K E ) ? (1 ? 1 ) 1+ KE (2) D KE Example: Supposing a company the nominal value equity were $ 100, and the dividends at the rate of 10 % were $ 10, if the cost of equity is 8%, then the market price of the shares will given by 10/8%, or $ 125. Incorporating growth in dividends:In our over-simplified example above, we have taken dividends to be constant. It would be unusual to expect that dividends will be constant, particularly where the company is not distributing all its earnings. That is to say, with the retained earnings, the company has increasing profits in successive ye ars, and therefore, it continues to distribute more. If dividends grow at a certain compounded rate, say g, then, Equation (2) above becomes: VE = D (1 + g ) (1 + K E ) = ? (1 ? 1+ g ) 1+ KE (3) D (1 + g ) KE ? gNote that we have assumed here that even the first dividend will have grown at g rate, that is, the historical dividend has been D, but we are expecting the current year’s dividend to have increased at the constant rate. If we assume the current year’s dividend will not show the growth, and the growth will come from the forthcoming year, then we can remove (1+g) in the numerator above. The formula as it stands is also referred as Gordon’s dividend growth formula, discussed below. Example: Supposing a company the nominal value equity were $ 100, and the dividends at the rate of 10 % were historically $10.Going forward, we expect that the dividends will continue to grow at a rate of 5% per annum. If the cost of equity is 8%, what is the market value? We pu t the numbers in the formula and get a value of $350. Note that we can also test the valuation above on Excel. If we take sufficient number of dividends, say, 1000, successively growing at the rate of 5%, and we discount the entire stream at 8%, we will get the same value. Example: Supposing a company the nominal value equity were $ 100, and the dividends at the rate of 10 % were historically $10.Going forward, we expect that the dividends will continue to grow at a rate of 12% per annum. If the cost of equity is 8%, what is the market value? This is a case where the growth in dividends is higher than the discounting rate. The growth in dividends is a multiplier; the discounting rate is a divisor. If the multiplier is higher than the divisor, then the present value of each successive dividend will be higher than the previous one, and hence a perpetual series will have infinite value. There is yet another notable point – the growth rate g above may be also be visualised as the appreciation in the market value of the share.That is, shareholders are rewarded in form of current earnings as well as growth in the value of their investment. Dividend-based equity models: Walter Approach: The Walter formula belongs to James E Walter, and is based on a simple argument that where the reinvestment rate, that is, rate of return that the company may earn on retained earnings, is higher than cost of equity (which, as we have discussed before, the expected returns of the shareholders, or rate of return of the shareholders), then, it would be in the interest of the firm to retain the earnings.If the company’s reinvestment rate on retained earnings is the less than shareholders’ rate of return, the company should not retain earnings. If the two rates are the same, then the company should be indifferent between retaining and distributing. The Walter formula is based on a simple analysis that the market value of equity is the capitalisation of the current ear nings and growth in price (g in our formula in equation 3 above). Hence, the basis of Walter formula is: VE = D +g KE (4) Here, the growth factor occurs because the rate of return on retention done by the company is higher than the cost of equity.That is to say, the company continues to earn at r rate of return on the retained earnings, and this is what causes growth g. Hence, g= r (E-D)/ K E Inserting equations (5) into (4), we have VE = (5) D KE + r (E – D)/K E KE (6) Where r = rate of return on retained earnings of the company E = earnings rate D = dividend rate Example: Supposing a company the nominal value equity is $ 100, and the dividends at the rate of 10 % are $10. Supposing the company earns at the rate of 12% , what is the market value of equity if the the cost of equity is 8%?The market value of the share comes to $ 162. 50. This is explainable easily. As the company is earning $12, and distributing $10, it retains $ 2 every year, on which it earns at 12%. The cap italised value of 0. 24 at 8% will be the expected growth. Therefore, the sustainable earnings of the shareholders will be $ 10 +3, which, when capitalised at 8%, produces the value $ 162. 50. Of course, the key learning from Walter’s approach is not what the market value of equity is, but how the market value of equity can be maximised by following a proper distribution policy.For instance, in the present case, it is not advisable for the company to distribute any dividend at all, as the company earns more than the shareholders’ opportunity rate. If the company was not to distribute anything, the market value of the share may increase to $ 225. Gordon growth model: Gordon’s growth model is simply Equation (3) above, that is, VE = D (1 + g ) KE ? g This is, as we have seen above, derived from perpetual sum of a geometric progression, under the assumption that the growth rate is less than the cost of equity. Modigliani and Miller approach:Franco Modigliani was aw arded Nobel prize in 1985 and Merton Miller in 1990 (along with Markowitz and Sharpe). M&M have theorised on the irrelevance of the capital structure, and a corollary, irrelevance of the dividend payout ratio to the value of the firm. Like several financial theories, M&M hypothesis is based on the argument of efficient capital markets. In addition, we believe that a firm has two options: (a) It retains earnings and finances its new investment plans with such retained earnings; (b) It distributes dividends, and finances its new investment plans by issuing new shares.The intuitive background of the M&M approach is extremely simple, and in fact, almost selfexplanatory. It is based on the following propositions: †¢ Why would a company retain earnings? Only tenable reason is that the company has investment opportunities. If the company does not retain earnings, where does it finance those investment opportunities from? We may assume a debt issuance, but then as M&M otherwise propoun ded irrelevance of the capital structure, they see a parity between debt and equity, and hence, it does not make a difference whether the new investments are funded by equity or debt.So, let us assume that the new growth plans are funded by equity. Shareholders price the equity shares of the company to take into account the earnings and the retentions of the company. If the company distributes dividends, the shareholders take into account that fact in pricing of the shares; if the company does not distribute dividends, that is also reflected in the pricing of the shares. If dividends are distributed, the financing needs of the company will be funded by issuing new shares. The issue price of these shares will compensate for the fact that the dividends have been distributed.That is to say, the market price of the share will remain unaffected by whether the dividends have been distributed or not. †¢ †¢ Let us take a one year time horizon to understand the indifference argumen t of M&M. We use the following new notations: Po P1 D1 n m I X : Price of the equity share at point 0 : Price of the equity share at point 1, that is, end of period 1 : Dividend per share being paid in period 1 : existing number of issued shares : new shares to be issued : Investment needs of the company in year 1 : Profits of the firm year in 1 The relation between the price at the beginning of the year (Po), and that at he end of the year (P1) is the simple question of discounted value at the shareholders’ expected rate of return (KE). Hence, Po = (P1 +D1) / (1+(KE) (7) Equation (7) is quite easy to understand. Shareholders have got a cash return equal to D1 at the end of Year 1, and the share is still worth P1. Hence, discounted at the cost of equity, the discounted value is the price at the beginning of the period. Alternatively, it may also be stated that the P1 = (P0 )* (1+(KE) – D1 (8) That is to say, if the company declares dividends, the price the end of year 1 comes down to the effect of the distribution.Equation (7) can be manipulated. By multiplying both sides by n, and adding a self-cancelling number m, we may write (7) as follows: nPo = [(n+m)P1 -mP1 +nD1)]/(1+(KE) (9) Note that we have multiplied both sides by n, and the added number m along with m is cancelled by deducting the same outside the brackets. mP1 represents the new share capital raised by the company to finance its investment needs. How much share capital would the company need to raise? Given the investment needs I and the profits X, the new capital issued will be given by the following: mP1 = I – (X – nD1) (10)Again, this is not difficult to understand, as the total amount of profit of the company is X, and the total amount distributed as dividends is nD1. Hence, the company is left with a funding gap as shown by equation (10). If the value of mP1 is substituted in Equation (9), we have the following: nPo = [(n+m)P1 – {I – (X – nD1)} +nD1)]/(1+(KE) (11) As nD1 would cancel out, we will be left with the following: nPo = [(n+m)P1 – I + X] /(1+(KE) (12) Since nPo is total value of the stock at point 0, it is seen from Equation (12) that dividend is not a factor in that valuation at all.

National Federation of Independent Business v Sebelius Essay

Life was different back in the 1880s. The telephone had just been invented, James Garfield was president, and doctors used heroin and cocaine as medicine. Alas, many doctors knew very little about medicine. Oftentimes unsafe and unsterile practices were used on patients. The NY Times reports that, â€Å"At least a dozen medical experts probed the President [Garfield]’s wound, often with unsterilized metal instruments or bare hands, as was common at the time. Historians agree that massive infection, which resulted from unsterile practices, contributed to Garfield’s death. One man suggested that they turn the president upside down and see if the bullet would just fall out. † Because of their usual lack of success, doctors did not charge very much for their services; it was very affordable most of the time, even for middle class families. However, as time and technology progressed, the cost of healthcare and medical instruments dramatically rose. In his â€Å"New Deal† package, President Roosevelt proposed a state-run healthcare system with compulsory health insurance for state residents, but states could choose whether to participate. The federal government would provide some subsidies and set minimum standards that the state had to adhere by. While the proposal did not pass, the idea of universal healthcare coverage for everyone stuck. Since Roosevelt, every single Democratic President elected into office has attempted to pass a version of universal health care, but none have achieved the feat. That is, until President Obama was sworn into office in January 2009. In his 2008 presidential campaign, he made healthcare reform a central issue. Both parties adopted their version of reform, but since Democrats held a majority in the House and the Senate at the time, their version was the one that passed. On March 23rd, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (dubbed by many Republicans as â€Å"ObamaCare†). According to the White House, it claims four key components of the law: stronger consumer rights and protections (which includes a ban on lifetime limits, a ban on denying children health insurance based on pre-existing conditions, and a ban on coverage cancellations), more affordable coverage (Private insurers must provide justification for double-digit increases in premiums), better access to care (Preventative screenings for cancer are now free), and stronger Medicare (Provides relief to seniors who cannot afford prescription drugs). Since insurance companies are required to provide care, it makes sense to buy insurance only when you need it. In other words, wait until you get sick to buy insurance, because they cannot turn you down. In order to combat this, the law includes an individual mandate, which requires anyone that can afford it to buy health insurance, or pay a penalty to the IRS. In essence, this is the part of the law that pays for it all. This is also the section many Republicans hate. In their philosophy, the government cannot force someone to buy something they may or may not need. They argued that this law was unconstitutional, and they sued in federal court to have the law nullified. There were three cases overall: one from the states (Florida v. U. S. Dept. of Health and Human Svcs. ), one from the federal government (U. S. Dept. of Health and Human Svcs. v. Florida), and one from the National Federation of Independent Business (Nat’l Fed. of Independent Bus. v. Sebelius). Due to conflicting rulings from the lower courts in different jurisdictions, the Supreme Court decided to hear the case to settle the differences. From March 26th to March 28th, 2012, the Supreme Court heard oral arguments from both sides. On the first day, the court heard argument over whether the Tax Anti-Injunction Act passed into law in 1867 barred the Supreme Court from even making a decision in this case. The Tax Anti-Injunction Act says, â€Å"No suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed. † Basically, it means that you cannot sue the government for a tax you believe is unfair, until you have already paid that tax. This was passed into law to prevent people from filing lawsuits against the government to avoid paying taxes. Potentially, this could mean that no one can challenge the constitutionality of the ACA (Affordable Care Act) until someone has actually paid the penalty. At the earliest, they could sue on April 15th, 2015. The Supreme Court held that since Congress specifically labeled the consequences of the mandate as a penalty rather than a tax, the Anti-Injunction Act did not apply to this case, and that the court had the authority to hear the arguments. On the second day, the court heard arguments over whether the ndividual mandate component of the ACA fell under the constitutional powers of Congress. There were two arguments from the Solicitor General’s side (the ones supporting the constitutionality of the ACA): the ACA was constitutional under the commerce clause, and that the ACA was constitutional under the taxing power of Congress. The states (the ones claiming the ACA is unconstitutional) argued that Congress could not create commerce for it to regulate, and that the law described the consequences of the mandate a â€Å"penalty†, therefore it is not a tax. On the third day, the court heard arguments on the severability of the law. They questioned whether the ACA could survive if the court struck down the individual mandate. In the end, in a 5-4 decision, the court upheld the individual mandate component of the ACA as a valid exercise of the taxing power of Congress. They concluded that a financial penalty for not buying something constituted a non-direct tax. Because it is a non-direct tax, it is not required to be apportioned among the several states. The justices that voted for the constitutionality of the law are the four liberal justices Sonia Sotomayor, Stephen Breyer, Ruth Bader Ginsburg, Elena Kagan, and the conservative Chief Justice John Roberts. The justices that voted against the constitutionality of the law are the other four conservative justices: Anthony Kennedy, Samuel Alito, Antonin Scalia, and Clarence Thomas. John Roberts was the key swing vote. When asked why he voted for a law he is personally against, Chief Justice John Roberts responded, â€Å"The Framers created a Federal Government of limited powers, and assigned to this Court the duty of enforcing those limits. The Court does so today. But the Court does not express an opinion on the wisdom of the Affordable Care Act. Under the Constitution, that judgment is reserved to the people. In my opinion, I applaud the decision of the Court. From the beginning, I thought the penalty was a tax; I assumed it was called a penalty for political purposes. People would not like the idea of a tax increase. In reality, the penalty is collected in the same manner as a tax, so there are no real differences between the two. I have also gained a newfound respect for Chief Justice John Roberts. I think it is commendable to put the law in front of your personal beliefs. He has done exactly what is expected of a Supreme Court justice. If I were a Supreme Court justice, I would have made he same decision that he and the four liberal justices made. There are two types of consequences this law holds: political and provisional. The provisional consequences of the law are the ones directly stated in the law: a ban on lifetime limits, Medicaid expansion, etc. The political consequences of this law are not explicitly stated, however they can be inferred and speculated upon. There are three major political consequences. The first consequence is that Obama can claim a major victory. He can now say his law withstood a Supreme Court challenge and passed the constitutionality test. A defeat would have been bad for the administration and the campaign. Instead, he has a chance to re-energize his base and reinstate the flow of campaign cash. The second consequence is that now that the law is no longer a legal issue, it becomes a campaign issue. Both Obama and Romney must sell voters on Obamacare. The court ruling could have stir a shift in public opinion among independent voters, and both candidates must appeal to this shift. Obama will insist this law was the right thing to do, while Romney will propose a new healthcare reform bill. The third consequence is that the ruling will enrage Republicans and make them more eager to vote for Romney so he can repeal the law. Voter turnout is expected to be lower than it was in 2008, and anything that can increase the turnout will be beneficial for Romney. This law and its subsequent legal challenge have major political consequences. Whether you live in the 1880s or in the present day, chances are you will need health care at some point in your life. Ever since President Roosevelt proposed universal health care back in the 1930s, many politicians have tried to pass it into law. Until the ACA, it was considered politically impossible; the idea just did not appeal to voters. The law has withstood a major legal challenge, and it will be up to Obama and Romney to convince independent voters that their version of healthcare reform is the best. If Obama wins the election, in 2014 everyone that can afford it must buy health insurance, whether they want to or not. If they don’t, they will pay a tax equivalent to 1% of their income. If Romney wins the election, he will try to repeal the ACA and replace it with a reform package of his own. Only time will tell what will happen.

Globalization and Accountability Essay

A better quality of life has been the objective of societies and nations. This has been pursued since the ancient times to the present. About one hundred years before the Trojan wars, Minos, mythical son of Zeus, organized a communal society in the island of Crete. For centuries, universal justice and virtue reigned in the island. Conditions were similar to the fabulous Shangrila of the Lost Horizon. It was like a paradise for the people. They contributed their individual ideas, talents, skills, and labor to the community for its development, and for he good of all its members. The needs of the people were justly supplied, and they were happy and contented. Plato, the Greek philosopher, designed an ideal state in his book, The Republic. He proposed common ownership of properties as a general rule. The concept of equality of Plato was further improved by Christian doctrines. However, more active and courageous social reformers emerged into the limelight during the age of Enlightenment and Industrial Revolution. Rousseau, Fourier, Bentham, Owen and Marx were the more prominent among them. They stressed the social aspects of the national order, such as cooperation, perfectibility of human nature, and other human virtues. The clamor for equality was not only political but also economic and social. The abuses of the capitalists and landlords, and the great disparities in income and wealth were the primary targets of reformers. The aforementioned economic and social problems still pervade in many developing countries. Throughout the history of the development of nations, only very few have become rich, such as those in North America and Western Europe. Most of the poor countries are found in Africa, Asia and Latin America. In terms of goods and services, the gap between the poor and the rich countries has become wider and wider. In view of the presence of modern transportation and communication, leaders of the poor countries have seen the tremendous prosperity of the rich countries. As a result, people from poor countries have developed the tendency to emulate the rich countries- their economies, technologies, ways of life, and even the architecture of their houses and buildings. However, some intellectuals have realized the disadvantage of such colonial mentality. They have crusaded for economic nationalism to free their countries from the exploitations of the rich counties- and from the weaknesses of their own people. Industrialization has been their dream of solving their persistent problems like poverty, insecurity, and excess population. Even Nehru of India claimed that real progress must ultimately depend on industrialization. Every nation, rich or poor, has economic problems. However, these are more serious and widespread in poor countries. Economic problems do exist because of two fundamental facts: resources are limited and human wants are unlimited. Human wants cannot possibly be all satisfied because resources are scarce. For example, every family wants a house and a farm. This is not possible in many countries, especially in less developed countries. In fact, most countries cannot even meet the most basic needs of their people like food, clothing, and shelter. In the case of the United States of America, the people are capable of satisfying their essential needs. If some groups cannot, it is the government that provides them with basic goods and services. Welfare programs and other social security benefits are made available to the less fortunate, and to the aged. But still, rich countries have economic problems. People, human as they are, are not ultimately satisfied with the consumption of basic goods only. Naturally, they aspire for a higher standard of living. And it is the responsibility of the economic system to help the people acquire it. The economic system of any nation has different factors that are being considered in order to establish and open greater economic opportunities (Soros, 2002). Globalization The remarkable progress in communication and transportation has exposed the high standard of living of a globalized nation. Through foreign travels, periodicals, and movies the peoples of the less developed countries have seen the many wonderful and modern things which have been created by an industrial society like the United States of America, France or Japan. In contrast, many leaders of the third world countries have realized the big difference in their still primitive products of development. Thus, their impressions of a globalized and industrialized economy have further improved. Henceforth, there has been a strong clamor among many of the third world countries for globalization. For years, this has been their aspiration. Through globalization, they believe they can eliminate the problems of poverty, insecurity, and overpopulation. No less than the great Indian statesman Nehru said that real progress must ultimately depend on globalization (Thompson & Strickland, 2003). However, globalization or globalizing a less developed country is certainly not an easy task. There are great obstacles along the long path of globalization. It is not only massive capital, modern technology, competent management, and skilled labor that are required. Well developed commercial sectors are also needed. And of course, the most important requirement for globalization is the restructuring of values and institutions in society. In spite of the formidable barriers to globalized development, it is not completely impossible for a less developed country to globalized economy. There were several poor nations which became industrial economies. They were able to conquer an almost impossible dream through a vigorous and sincere implementation of economic, social, and political reforms. Former countries like England, Germany and the United States of America met fewer difficulties in globalizing their economies because of most favorable economic and political conditions. There are several processes being followed in terms of modern growth brought about by the system and principle of globalization. It must be noted that globalization among the developed countries did not happen overnight. Prior to their globalization, they experience various changes and improvement. The following are the most notable: 1. Economic, social, and political institutions were restructured to pave the way towards globalization and industrialization. 2. There was a rapid technological improvement. 3. Factors of production like capital, labor, and entrepreneurial scheme were made to be more responsive to globalization and industrialization. 4. Substantial improvement in transportation, communication, and electrification were undertaken. 5. Social facilities and services were increased. 6. Agricultural and commercial industries became variable. The aforementioned developments were greatly responsible in the globalization of the highly developed countries. Clearly, their economic growths did not go through a quick and easy process. They laid down the foundation of their industrial development. Such experiences of the industrial countries should provide a lesson to less developed countries that are aiming for rapid globalization and industrialization. However, there are some countries that have achieved very rapid industrial growth. But the other sectors of their economy have not developed as fast as their industries. For instance, there have been no appropriate changes in some industries such as the agricultural industries, public administration, social structure and values among other things and industries. But then again, it can be seen that there is more rooms for globalization even if it means that other industries are left behind. Moreover, there has been a great need for private sectors to be improved and flourished in order for globalization to push through. As far as the economics is concerned, the big challenge is poverty, and the surest route to sustained poverty reduction is economic growth. Growth requires good economic policies. The evidence strongly supports the conclusion that growth requires a policy framework that prominently includes an orientation towards integration into the global economy. This places obligations on three groups: those who are most responsible for the operation of the international economy, primarily the governments of the developed countries; those who determine the intellectual climate, which includes this audience but also government and non-government organizations and individuals; and the government of the developing countries who bear the major responsibility for economic policy in their countries. Economic globalization, the ongoing process of greater economic interdependence among countries, is reflected in the increasing amount of cross-border trade in goods and services, the increasing volume of international financial flows, and increasing flows of labor. As is well known to our profession, economic globalization thrived in the period before 1914, but was set back by the two World Wars and the Great Depression. 6 The international financial order that was established at the end of World War II sought to restore the volume of world trade, and by 1973, world trade as a percentage of world GDP was back to its 1913 level – and it has continued to grow almost every year since. While the founders of the Bretton Woods system saw the restoration of trade in goods and services as essential to the recovery of the global economy, they did not have the same benign view of capital flows. Nonetheless, capital flows among the industrialized countries did recover during the 1950s, and intensified in the 1960s. Rapidly they became too powerful for the pegged exchange rate system to survive, and by 1973, as a result of the impossible trinity – of a pegged exchange rate, capital mobility, and a monetary policy directed at domestic objectives – the Bretton Woods adjustable peg system had to give way to flexible exchange rates among the major countries. Capital flows to developing countries grew more slowly. In the late 1970s and early 1980s they consisted mainly of bank loans; by the 1990s they took the form mainly of foreign direct investment and purchases of marketable securities. And as the volume of international capital flows to and from the emerging market countries – the more developed and larger developing countries – increased, the impossible trinity once again asserted itself, and in a series of crises, country after country was forced to give up its pegged exchange rate and allow the currency to float. By now, the gross volume of international capital flows relative to global GDP far exceeds the levels reached in the period just before 1913, though net flows of foreign direct investment have not yet attained the extraordinary levels of the decade before World War I. It is generally believed that with respect to migration and labor flows the modern system is less globalized than it was a century ago. In 1911, nearly 15 percent of the United States population was foreign born; today that number is probably a bit above 10 percent. Emigration rates from Europe, especially Ireland and Italy, were amazing: 14 percent of the Irish population emigrated in the 1880s, and over 10 percent of the Italian population emigrated in the first decade of the twentieth century. Jeffrey Williamson (2002) attributes a significant part of the convergence of income levels in the Atlantic economy in the late nineteenth and early twentieth centuries to mass migration. Whether or not migration and labor flows are greater now than they were a century ago, we are becoming more globalized in this regard too, for migration rates have been rising – and in a potentially important way, for more migration than in the past is from less to more developed countries. All this is at an abstract level. In terms of people’s daily lives, globalization means that the residents of one country are more likely now than they were fifty years ago: to consume the products of another country; to invest in another country; to earn income from other countries; to talk on the telephone to people in other countries; to visit other countries; to know that they are being affected by economic development in other countries; and to know about developments in other countries. Globalization is much more than an economic phenomenon. The technological and political changes that drive the process of economic globalization have massive noneconomic consequences. In the words of Anthony Giddens, a leading sociologist: â€Å"I would have no hesitation in saying that globalization, as we are experiencing it, is in many respects not only new, but also revolutionary. Globalization is political, technological and cultural, as well as economic. The non-economic aspects are at least as important in shaping the international debate as are the economic aspects. Many of those who object to globalization resent the political and military dominance of the United States, and they resent also the influence of foreign – predominantly American – culture, as they see it at the expense of national and local cultures. The technological elements matter in practice as well as in the debate. For instance, the events of September 11, 2001 could not have taken place before the current global era. The communications and transport systems that have accelerated the pace of globalization are also at the disposal of terrorists, money- launderers, and international criminals. On the positive side, improvements in communications and the spread of information were critical to the collapse of the Iron Curtain. People learned what was happening in other countries, and understood that they did not have to live the way they were living, and the Iron Curtain fell. A broad range of critics is arrayed on the other side. Among them are academics, opinion leaders, individuals and groups who see their interests being affected by globalization, politicians, NGOs, and demonstrators – and these categories are not mutually exclusive. To listen to the debate in the terms each side paints the other, who believes that all is for the best in the best of all possible worlds, and those who believe that the world is going to hell in a hand basket. That is doubly misleading. In the first place, many of those who regard themselves as pro-globalization know that there is far too much misery in the world, that there are many wrongs to be righted in the global economy, and that it could be made to operate much better. And on the other side, many – but not all – of the critics are not against globalization. Rather, from NGOs demonstrating for further debt relief and campaigning for greater access of developing country exports to industrialized country markets, to academic critics questioning current policy views, many are seeking a better and fairer globalization.

Cognitive Behaviour Therapy Research Paper Example | Topics and Well Written Essays - 1500 words

Cognitive Behaviour Therapy - Research Paper Example This is concerning the use of thoughts to determine behaviour and feelings. Therefore, it cognitive behaviour therapy aims at helping patients understand distorted beliefs that affect the way they carry themselves and their emotions, while at the same time suggesting useful ways in which their condition can be corrected to fit appropriate attitudes (â€Å"Cognitive Therapy†, n.d.). In such cases, cognitive therapists work collaboratively with clients by taking an educational role and giving their patients the role of trying out new treatment methods. The methods are usually alternatives to their conventional and traditional methods of solving problems. This way, the therapist collects information to analyze various therapeutic strategies likely to succeed in treatment, as well as dysfunctional thoughts that a patient may have, inhibiting their well-being (â€Å"Cognitive Therapy†, n.d.). Theoretically, the belief system used in cognitive behaviour therapy are in the for m of a therapists attempt to uncover the underlying assumptions borne by a patient. This is with regard to a patent’s rules or values that predispose them to depression, anxiety or anger. These are the belief systems that patients bear towards themselves relating to what they perceive themselves to be as well as how they would like to be. Such conceptions include the need to be understood by others, need to be perfect and sense of worthiness and approval among others. Therefore, therapists following this aspect of cognitive therapy are required to recognize the potential and belief systems for each patient, as well as the behaviour and thought process that is typical of them (Leahy, n.d.). Cognitive distortions are also called automatics thoughts and are conscious, spontaneous thoughts that are associated with negative emotions. They are the result of biases in the thought process and are categorized in a number of ways. Mind reading a cognitive distortion is based on the ass umption that the patient already knows that which another person is thinking without adequate evidence. This way, one ends up having negative thoughts about themselves as they usually have no clue as to what the other person is thinking before drawing conclusions on what they think. Another feature of cognitive distortion is that of fortune telling that is characterized by pessimism about future events. This is based on negative occurrences likely to happen in the said future (Leahy, n.d.). In addition, patients that require cognitive behavioural therapy have a tendency to label and discount positive events. This is concerning assigning negative traits to themselves and other members of the society while downplaying their achievements. While downplaying achievements in society is considered modest, in cognitive therapy, any positive achievement by oneself or others is labelled as trivial and not worth mentioning, so that they do not count. Still on negation of events, patients tend to focus most of their energy on negative events where they rarely notice positive occurrences happening in the society or to them and, as a result, they tend to live depressed lives. The aspects of cognitive distortion are numerous, whereby all revolve around the aspect of negative attitudes and behaviours directed at society, and oneself, while at the same time questioning what other probable event would be probable to

Survey interview Essay Example | Topics and Well Written Essays - 250 words

Survey interview - Essay Example Likewise, it was emphasized that deciding respond was completely voluntary and the results would be presented only as part of the class requirements. From the designed survey, it could be deduced that the respondents were able to accomplish it in the stipulated time frame since the questions were mostly close-ended questions and only one was open-ended (question 13) (Attending a Women’s Varsity Sport , 2014). The findings revealed that only freshmen students were not fully aware of the women’s varsity sport which could be due to their being new to the campus. Likewise, the students from the junior and senior levels were more aware of the sports events for women but their attendance to these events depend highly on their enthusiasm for sports or if they have friends who they want to support and see. The response to the last question regarding motivating them to attend women’s varsity sporting event in the future depended on the time for extra-curricular activities; as well as their genuine enthusiasm for the sport. After the survey and interview with each respondent, I thanked them profusely and expressed how grateful I was for their participation and support to this endeavor. I reiterated that the results would be presented in class, and if they are interested, I could provide them with a report on how the results eventually emerged. The experience provided me with the opportunity to build my confidence in interacting with people from diverse backgrounds with the aim of achieving the learning objectives identified for the class. As such, it was an enlightening and rewarding learning experience where interview skills were enhanced; as well as the ability to interpret survey

Financial and accounting Essay Example | Topics and Well Written Essays - 1500 words

Financial and accounting - Essay Example Second, in financial accounting, financial statements are deemed important while users of management accounting focus on accounting reports as the most important products (Stolowy & Lebas 2007). Third, in financial accounting, the IFRS or IAS determine what is supposed to be included in financial reports and statements while in management accounting, managers determine what they want captured in accounting reports. Fourth, financial accounting focuses on historical information whereas management accounting basically utilizes forecasts or focus on future information (Rajasekaran & Lalitha 2011). Fifth, while financial accounting put emphasis on data reliability and objectivity, management accounting emphasizes on relevancy of data. Sixth, financial accounting yields reports about the entire company while management accounting yields reports that suit the needs of the management. Seventh, financial data are usually subject to audit verification while management data are no subject to a uditing process (Rajasekaran & Lalitha 2011). Companies are required to prepare financial statement at the end of their trading periods to disclose information that is deemed crucial for various users of financial statements. 1) Potential investors: Potential investors require financial statements to help them assess financial viability of putting their investment in a company. Based on the information disclosed in the financial statement, for instance profits in profit and loss account, investors are able to forecast future dividends. Also, potential investors may use financial statement figures to gauge the risk associated with investing in a particular company (Gibson 2009). For instance, investors may use high fluctuation in the reported profits of a company as an indication of high risk. Consequently, financial statements assist prospective investors in making investment decisions. 2) Shareholders: Financial statements assist

Business Operations Essay Example | Topics and Well Written Essays - 2250 words

Business Operations - Essay Example The essay "Business Operations" talks about the businesses operations in general by the example of Brazelia Med Spa company. The paper also analyzes what skills the effective manager should possess. Brazelia Med Spa is a B2C (Business to Customer) business with products and services ranging from medical, Intravenous nutrition, medical aesthetic, massage therapy, weight management, aesthetic, body care, chronic pain sports injury, and labs. There are also a number of procedures conducted in this institution such as intravenous nutrition therapy, Botox/Dysport and dermal fillers, weight management, and hormone replacement therapy. There are other Spas in Florida that compete with Brazelia in offering these services. Brazelia is a for-profit institution that has been open to the public since the year 2007 and hence has a strong customer base. This institution's mission is "to bring family's health to an optimal and harmonious balance". During my internship, I worked at the reception, insurance department, and financial department. My roles and responsibilities included organizing patients' applications alphabetically, filling out patients' information such as name, cell number, date of birth, and email address in a sheet, and putting all the important patients' details in the system. It was also my duty to ensure that all patients' confirmed their appointments. And it is worth noting that managers face many challenges blending knowledge, skills, ambitions, and expertise of a diverse group of employees.