Discuss about the Principles of managerial finance Corporate.
Relevant theory of bird in the hand directly indicates about dividend distribution that is conducted by companies. the theory states that investors are risk averse in nature and tend to acquire stocks providing higher dividends (Krishman 1963). Other researches also supported the theory by detecting significant role of dividend in improving returns. The main logic behind the behavior relates to the returns that is provided from the equity market, which is relatively uncertain (Gordon and Shaprio 1956). Informational symmetry in the system of the stock market is relatively considered by the researchers, which increases likeness of dividends among investors. However, the agency theory directly indicates that dividend payments mainly reduces the overall funds that is available to the organization and hampers their ability to increase their profits by investing in different projects. Some of the researchers also reflected on the behavioral side of the policies regarding dividend payment decisions. Relevant decisions indicating increase in portion of dividend payment are evaluated, as it directly affects company’s overall earnings. The researcher also indicated that managers take relevant decisions regarding increment of the dividend after evaluating the overall earnings of the organization and ability to support future expenses after the payment. Furthermore, the research also evaluated that dividend payment policy and tax structure of the organization, which indicated that dividend payment decision is relatively followed from cash flow of the firm and not the net profit figure (Linther 1956).
Relevant evaluation of 392 major forms are conducted within a time from 1946 to 1964 for identifying the measures that is taken by managers while providing dividends to the investors. The Lintner model also explains the dividend payment decision in industries such as coal mining sugar jute textile chemical and cement industries. Furthermore, the decisions made by managers regarding increment in dividends only conducted if there are certain regarding rise and company's net profit (Brittain 1966). From the relevant evolution of dividend policy theory bird in hand hypothesis is considered to be improper in nature. The theory also indicates that risk level assumption directly affect dividend condition of the company. This relevant risk level directory allows the managers to evaluate current condition of the form and ability to sustain growth in the volatile market. Manager only increase the dividend after being certain about the permanent nature of increasing profitability obtained by the organization (Fama and Babiak 1968). From the evaluation it is also identified that dividend paying PSUs compared to the total number of PSUs are relatively small. This indicates that dividend payment to issue remains constant for most of the companies even if the EPS increases. However, the other researchers state that past revenue growth future earnings of the shareholders and the systematic risk directly allows the managers to determine the dividend payout policy. The Lintner Model is mainly tested on Tunisian companies to determine their dividend policies. Moreover, from the research relevant information regarding Dividend policy is also identified to be the current earnings obtained by the organization. Without the estimation of the current earnings that is gathered by the company the managers are not able to identify the relevant dividend payments that needs to be conducted (Rao and Sarma 1971).
Lastly, researches also evaluated determinants of Corporate Dividend policy that was used by Jordanian companies. This helped in identifying the portion of ownership that was maintained by government and owners (Bhattacharya 1979). Furthermore, the Dividend payment decisions is mainly made on size, age, and profitability of the firm. Other researches mainly evaluated the companies in Pakistan who were reluctant to pay dividend to the investors due to reduced profits and growth. The searchers also evaluated determinants of dividend in contacts of gulf cooperation Council countries with a primary intention of paying the difference is reduction of agency cost. the research conducted in the study likely conclude that dividend payout ratio as a correlation with ownership structure, from profitability and size, while leverage ratio as negative correlation with the dividend payment. Therefore, it is estimated that dividend payout ratio increases with the overall increment in revenue and ability of the company to attain higher growth (Saxena 1999). Without any future confirmation regarding growth in revenue management are reluctant to pay dividends.
Data and Research Methodology:
The overall study mainly aims in determining the divided policy of the firm, which are listed in Muscat Security Market. The data is mainly collected to the period of 2010-2015, where the 30 Index Security Market is listed. The data for the companies are mainly collected from Muscat Securities from the website, where all the relevant dividend pay-out ratio of the company is detected. The formula used for detecting the dividend pay-out ratio are depicted as follows.
Dividend Pay-out Ratio= Dividends/ Net Income
Firm Size: The overall firm size is relevantly adequate, where the actual total assets of the company could be identified with the help of balance sheet. Fama and French mainly stated that small firms mainly pay lower dividend compared to big firms, as they are not able to accumulate the required level of revenue to pay high dividends. this also relates to the information asymmetric and higher cost, which is incurred by small companies while issuing securities. On the other hand, for big companies it is easier to pay higher dividends and as well as incur low cost in raising the relevant funds. The researcher mainly states a positive link between firm size and dividend payment (Solberg and Zorn 1992).
The dividend pay-out ratio: The ratio mainly indicates the overall dividend paid by the stakeholders related to the net income of the organization. The dividend payout ratio also indicates a constant cash outflow, which is provided by the company to its investors. The amount that is not paid to the investors are mainly retained by the organization for improving its future growth. The net income is mainly shown in the income statement of the organization where the management needs to understand whether the pay dividends or invest in future activities. The formula is used by the management for reinvesting the earnings in new future activities. This dividend payment ratio allows the management to adequately improve income by adopting new projects.
Earnings Per Share (EPS): The EPS ratio directly helps the management to identify the minimum profit that is obtained from each share. The EPS directly represents the overall net income that is obtained by the organization and allotted to all its common stock. The EPS is mainly calculated with the help of following formula [(net income - preferred stock dividends) ÷ (outstanding shares)].
Return on Equity (ROE): The ratio directly indicates the relevant profitability that a firm earns during the fiscal year. The equity ratio also uses net income and common equity to identify the relevant return that is provided on the investments conducted by the equity investors (Naceur et al., 2006). The firms with high profits is expected to have a higher cash flow and can be high dividend. Furthermore, both current and past year's profit impact the dividend payments that is conducted by organizations. appositive relation between dividend and profitability the identified by researchers, which depicts the increment and evidence conducted by organization (Amidu and Abor 2006).
Current Assets and Current ratio: From the constitution of current assets and current ratio the dividend that is paid by the organization are mainly considered to be a liability. This relatively indicates on the role, which is played, as an issuing company or an investor. Being investor the dividends are mainly considered and income or an asset, while for the company issuing the dividend it is mainly a liability, which reduces the current ratio value. Dividend payable is considered to be a short term liability as it needs to be paid to the investors within one year. Therefore, the dividend payable needs to be included calculation of current ratio to determine the actual financial position of the company.
Dividends Per Share (DPS): Dividend per share mainly considered to be the overall amount that is paid to shareholders on per share basis. this dividend per share is mainly calculated by dividing the total outstanding shares with the total dividend paid by the organization for the current fiscal year. the formula directly help son depicting the relevant dividend per share, which could be used in identifying the dividend payout ratio and compare the growth from previous fiscal year. The formula used is as follows (total dividends paid out over a period - any special dividends) ÷ (shares outstanding).
Earnings per share and dividend per share relatively different, as one directly indicates the oral earnings of the organization, while the others states expenses incurred by the organization. The dividend per share is calculated on the portion of the company's earnings after retaining the relevant income for future growth.
Cash Flow (CFLOW): Cash flows mainly determined to be overall value, which is calculated from pre-tax profit plus depreciation divided by the total assets. This relevant increase in free cash flow according to the researchers radically raises agency cost, while the dividend payment reduces agency cost. Jensen et al. (1992), La Porta, Lopez de Silanes, Shleifer and Vishny (2000), Baker, Saadi and Gandhi (2007) and DeAngelo, DeAngelo and Stulz (2004) suggested that relevant positive relation between cash flow and dividend payments are detected by the researches.
Debt, Equity and Dividend: The irrelevance theory directly states that changes in financial policy or capital structure directly relate to dividend policy where it is assumed that debt is for paying only in equity or vice versa. Therefore, the debt to equity ratio does not affect any kind of valuation of company, why the inventory also indicate that the dividend policy should also not affect companies value. From the perspective of balance sheet companies well you should equal real assets, which indicates that both left hand side of the balance sheet and right hand side of the balance value remains same. The total assets of the company need to equal its overall liability, which in turn makes the company solvent. On the other hand, both static trade off theory and pecking order theory directly explains the critical factor about capital structure, due to the impact of current real world scenario markets are imperfect, tax, transaction cost, information asymmetry and moral hazard. Hence, it is estimated that companies with high leverage mainly tend to pay low dividend, as they have the obligation to pay other forms of interest. Companies having higher leverage are also not obliged to pay dividends, as their source of capital is not from equity. Some of the company is mainly used the static trade off theory and reach their depth capacity, which allows them to read the tax benefits and reduce any kind of dividend payments. Furthermore, the company could also finance equity by issuing new shares and pay cash dividend if there was insufficient cash flow or no growth obtained by the organization.
The relevant tables directly indicate the financial services provided by 15 companies in 2016. Furthermore, the financial sector directly contains forms, which provide financial services to both retail and commercial customers. The sector directly involves insurance companies, real estate, banks and investment funds. Moreover, it is estimated that financial services performed best in low interest environment, as large portion of income is generated from mortgages and loans, which directly increases in value if interest rate drops. According to the above table, it is estimated that Bank of Muscat has the highest interest rate of 151% EPS. this directly in the keep the importance of the financial measure where the company's profitability can be identified, as high EPS indicates a better and profitable position of the company.
From the overall evaluation of the financial services provided in Oman, is estimated that corporate banking, investment banking treasury, private banking, retail banking, and asset Management Services adequately provided within the premises of the country. the overall Bank in Oman directly estimated an asset of $28.1 billion in 2016, where the lowest EPS was found in bank Nizwa. The bank of Nizwa is mainly considered to be one of the dedicated Islamic Bank with full Sharia compliant products and services currently operating in Oman. The formation of Nizwa bank mainly came about with the central bank of Oman, where the license was granted to Sheikh Saud Bin Ali Al Khalili, 92 other Omani individuals, companies and pension funds. The relevant licensing directly allowed the above shareholders to constitute and found the bank. However, the declining trend of the company directly indicates a troublesome future, which might reduce its stock price. On the other hand, the liquidity of bank Muscat is higher comparing with the bank of Nizwa due to its ability to comprehend different services.
The term that is used to describe the conversion of asset to cash is liquidity, which is used by investors to detect ability of the company to supported short term obligations. most liquid assets that could be identified as cash, as it could be used immediately by the organization. Certificate of deposits are less liquid, as a relevant penalty for converting them into cash needs to be borne before maturity date. saving bonds, shares of stock, options and commodities a failure considered to be liquid as it can be sold readily in the market for cash. The above measure can be adequately used by the organizations for converting the relevant assets to cash with little effort and slight penalty to support its activities.
From the relevant evaluation it could be understood that liquidity level of an asset needs to be kept in mind before the investment. Other than selling the asset the organization can borrow cash against the asset for supporting its activities. This overall lending process is mainly conducted with the help of a bank, which allows the company to accumulate the required capital in form of debt. The bank with pool of money from many depositors could eventually helped the lender get the required amount for its loan to meet its financial obligations. The depositors if needs cash right away can directly withdraw it from the bank rather than going to the borrower and demanding payment of the entire note. this might help in reducing any kind of hassle in financing for both borrowers and lenders. Therefore, the bank act as a financial intermediary between the borrower and lender for smoothly conducting the lending operation. From the relevant valuation the increment return on equity can be seen, which in 2016 has reached to 60% for the bank of Muscat. This directly indicates the overall profitability obtained by the organization during the fiscal years. The higher ROE indicates that the company is deploying shareholder’s capital an increasing the profitability obtained from operations.
From relevant evaluation the return of assets is high for the bank of Muscat, as profitability of the organization compared to process has return increased. Moreover, the management is directly utilizing the asset adequately to generate earnings. This relevant utilization conducted by the management of bank of Muscat is relatively lead to an increment and growth from 0.23 in 2010 to 0.67 in 2016. On the contrary, the overall performance of bank of Nizwa is relatively lower in comparison to other banks. The bank offers relevant services of a commercial bank in accordance with the central bank of Oman, and the Banking Law Royal Decree No. 114/2000. Moreover, the bank of Nizwa mainly increased the overall growth from 2013 to 2016 to 3% only.
Takaful an Omani insurance company founded in 2013 with a Cooperative concept between funds and operations of shareholders. The policyholder is mainly considered the participants; mutual benefit investment is being conducted by the company. The managers take responsibility and operate the company on behalf of the shareholders. Individual member mainly contributes to the objective of protection and welfare of the entire group of policyholders held by the company. The insurance contract directly indicates a mutual agreement between the policy holders to support them during misfortune's. Takaful is a new company in the country which has performed good in few years due to the measures taken to reduce the risk of policyholders.
Al Madina investment company is also unique organization built on its market capitalization, it develops new avenues for growth both in local economy and beyond the borders. The company is engaged in promotion of participants to promoters of project diversified in different sectors of the economy. Company also has investment in associate such as flexible industry package and Oman international marketing to support activities. the company sold its own share to Al Madina financial and investment services as per the analysis of other insurance company. The company’s net revenue in 2016 accumulated to 5.07 million, while the net income came to 120.43k with a midcap of 11.60m and employee strength of 6.80k
Relevant determinants of Corporate dividend payout ratio for Muscat security market has been evaluated in the research for the period of 2010 to 2015. the use of random effect Tobit model 1 has been conducted to cluster dependent variables of the research. From the relevant evaluation it could be understood that large farms be higher dividends, whereas firm having less information asymmetry and lower cost are not able to be hired evidence. Furthermore, it is estimated that firms not paying dividend mainly retain their earnings for future growth and development. Hence, it is estimated that new firms have positive expectation about the future, which is why the dividend payment has been increasing for the shareholders. There is positive relation between cash flow and dividend payment ratio, which is depicted in the literature review. However, negative relation between managerial ownership and dividend payment is found when forms dividend payout ratio is evaluated (Yildiz et al., 2014).
The research findings directly shed light on the relevant measures that is taken by companies to manage their dividend policy. Both investors and companies can take advantage of the findings in making relevant decisions regarding investment in Companies. Furthermore, relevant research can be conducted on examining the determinants of dividend policy for different industries which might help in identifying the dividend payout ratio. Moreover, the corporate governance impact on Dividend policy can also be examined in further research.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.
Argenti, P. A. (2015). Corporate communication. McGraw-Hill Higher Education.