soalan 4 assignment - Dividend policy and common stock...

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Dividend policy and common stock price Dividend comes from the Latin word “ dividendum ” which means "the thing which is to be divided among all". A dividend is allocated as a fixed amount per share. Therefore, a shareholder receives a dividend in proportion to their shareholding. Dividend policy remains a source of controversy despite years of theoretical and empirical research, including one aspect of dividend policy: the linkage between dividend policy and stock price risk (Allen and Rachim, 1996). Paying large dividends reduces risk and thus influence stock price (Gordon, 1963) and is a proxy for the future earnings (Baskin, 1989). A number of theoretical mechanisms have been suggested that cause dividend yield and payout ratios to vary inversely with common stock volatility. These are duration effect, rate of return effect, arbitrage pricing effect and information effect. Duration effect implies that high dividend yield provides more near term cash flow. If dividend policy is stable high dividend stocks will have a shorter duration. Gordon Growth Model can be used to predict that high-dividend will be less sensitive to fluctuations in discount rates and thus ought to display lower price volatility. The stock or capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors. Stock is distinct from the property and the assets of a business which may fluctuate in quantity and value. As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate decisions. New equity issues may have specific legal clauses attached that differentiate them from previous issues of the issuer. Some shares of common stock may be issued without the typical voting rights, for instance, or some shares may have special rights unique to them and issued only to certain parties. Often, new issues that have not been registered with a securities governing body may be restricted from resale for certain periods of time. This paper describe a dividend policy for Malayan Banking Berhad (Maybank) as well as common stock price. Maybank has a long-term dividend policy of a 40- Page | 1
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60% dividend payout ratio based on reported net profit attributable to shareholders. For the past financial year, the share paid a final gross dividend of
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This note was uploaded on 02/06/2011 for the course BUS 663 taught by Professor Hjmahyudin during the Spring '11 term at International Islamic University Malaysia.

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soalan 4 assignment - Dividend policy and common stock...

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