Corporate Finance Report: Dividend Policy, Models and Tesco Analysis

This report delves into the core concepts of corporate finance, particularly focusing on dividend policies and their implications. It begins by differentiating between dividends and share price growth, exploring their relationship and the role of dividends in rewarding shareholders. The report then examines the calculation of dividend payout ratios and explains dividend yield and payout ratios. Furthermore, it analyzes dividend valuation models, including Walter's and Gordon's models, and their impact on share prices, as well as the dividend irrelevance model theory. A significant portion of the report is dedicated to a case study of Tesco's dividend policy, including its historical decisions and factors influencing those decisions. The report concludes by highlighting the importance of dividend policies for organizations, emphasizing their role in attracting investors and maintaining market sustainability.

CORPORATE FINANCE

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Difference between dividend and share price..............................................................................1
Relationship between dividend and share price growth..............................................................1
Policy of rewarding shareholder..................................................................................................1
Calculation of dividend payout ratio...........................................................................................1
TASK 2............................................................................................................................................1
Explanation of dividend yield and payout ratio...........................................................................1
Dividend valuation model and its impact on share price.............................................................1

TASK 3............................................................................................................................................1
Dividend irrelevance model theory.............................................................................................1
Tesco dividend policy..................................................................................................................1
Decision regarding dividend........................................................................................................1
CONCLUSION................................................................................................................................1
REFRENCES...................................................................................................................................1
INTRODUCTION
Corporate finance can be defined as field of financial management which is related with
taking decision regarding financial policies, statement and cash inflow and out flow of
transaction related to finance. In order to understand the conception of corporate finance
TESCO has been taken. TESCO is Multinational Corporation and famous brand in
supermarket industry in the worlds. Total branches is spared in all over the world. The
organization provides grocery pr5odctd and service to their customers through their supply
chain of super market. In this report requirement of dividend, decision taken on divine,
methods, and models use for divine, ratio analysis of dividend payout related to TESCOA
has been describe briefly. This ratio also considers policy of dividend of the organization
and factors affecting theses policy.
TASK 1
Difference between dividend and share price
Dividend : It can be defined as part of retain gearing which is reserve by organizations to
distribute their shareholders. Dividend can be treated as award or prize or reward for
shareholders of the business entity given by owners for their investment.

Share price growth: It is a situation n which organization generates positive, sustainable
cash flow and it is expected that this cash flow is increasing at higher rate n future. Share
price growth is a phenomenon under which market rice of share increase through which
organization is able to generate profits. Dividend is essential part of business organizations
policy through which business manager decide their future growth rate as well as postion
in market.
Divined and share price growth both a part of organization profits but there will be some
difference which prescribe below
Dividend Share price growth
Dividend can be known as portion of
organization ‘s revenue that company able
to distribute their shareholders (Cline and
Williamson, 2016).
Share price growth is the rate of growth
which describe how profitable and
organization of their shares.
It can be distributed in many forms It cannot be distributed in different forms
Dividend can be provided by organization at
the end or internal period of time.
Share price growth rate is increasing and
decrease as per the effect of economy
factors
connection between growth of share price and dividend
The link between dividend and share price has direct connection. As share price growth rate are
depend on dividend factor also. Higher dividend rate show that value of share price goes
high as well as it also effect on the future rate of share. On the other side growth rate is the
symbol of organization profitability. Manager decide distribution of dividend by taking
consideration with their shareholders thus it is also effective and essential (Fam and Stern,
2016.).
Policy of rewarding shareholder
This is policy made for shareholder to provides them in form of dividend or bonus share or
increasing their investing share in organization. TESCO also apply this policy within their
organization in order to maintain relationship with shareholders. They give them sharing in
profits, proved them certificate, and increase ration of their dividend earning.

Calculation of dividend payout ratio
It is the % share of the net earning distributed to the shareholders as dividend . For determining
dividend payout ratio, liquidity position of company, requirement of funds, shareholders
preference all factors are considered. Following are the ratio of dividend payout of TESCO
Dividend per share
Particular Formula 2017 2018 2019
Dividend per
share
Annual Dividend
/ Number of
Share
0 2 4.10
Interpretation: From this calculation it has been identified that TESCO ‘s earning and rate of
profitability has been increased since 2017 as they rate of dividend as been increase.
Earnings per share

Particular Formula 2017 2018 2019

Interpretation: Earning per share value of TESCOA has been increase in higher rate in 2028 than
it was decrease number2029 due to trade issue
Share price
Particular Formula 2017 2018 2019
Share price Intrinsic value of
business/
Number of
outstanding share
194 200 214
Interpretation: price value of share of TESCOA has been increase it mention the future share rate
also increased within maximum growth rate.

Explanation of dividend yield and payout ratio
Dividend yield : It can be defined as percentage of per share dividend and price In other words it
can be refers as organizations’ yearly payment of dividend divided by capitalization of market
rate.. It can be caluate3d with growth or without growth model.
Dividend valuation model and its impact on share price
For valuation of dividend 2 types of theories has been dev3elpoied relevance and irrelevance
theory of dividend in within different types of model has been developed for calculation of value
of divided. Gordon’s and Walter’s model are included in relevance theory of dividend valuation.
Walter model of valuation of dividend (Liu, 2018).
As per the perception of Professor Walter when business organizations provides dividend to their
reliable shareholders , their shareholders reinvest the amount of dividend into company for future
higher return expectations, Dividend cost can be measures as the cost of opportunity organization
earn by its cost of capital . Business organization will be able to use these dividend as if entity
not paid capital to their essential shareholders. As per this model if r< ke then the organization
should distribute the profits in the form of dividend to gave shareholders high return .And id=f
r>ke then the investment opportunities reap good outcomes for the organization and thus entity
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should invest in retain earning. The relation between k and r is essential part to identify dividend
policy.
Assumption
Business organization fiancé all the investment through retained earning that is debt or new
equity not issue
The organization rate of return and its cost is constant.
All earnings are either distributed as dividend or reinvested internally .
The firms has very long or infinite life.
P : D+r ( E-D) / ke/ ke
P = Market rate
E = Earnings per share
D : Share per dividend
Ke = cost of equity
R= rate of internal return.
Dividend irrelevance model theory
It includes two types of approaches, traditional approach and Modigliani and miller approach.
This model says that dividend distribute by organizations will be consider as residual form
which has been reserve by organizations for their essential NPA projects. The general idea of
this hypothesis is that payment payment is hopeless as a proxy in influential opportunity
marketplace value of the organization. dividend irrelevance model have been criticised for not
having any support it can be defined as issue in of corporate sector which is common for
decision makers..
Miller model of dividend model describe that investor can certainly create their own currency
from their stock according to their cash needs regardless of whether the stocks they own pay
dividend or not . If shareholders have not use their distributed dividend money then they simply
reinvest the amount of divided in the business organization again.( Aggarwal, Schloetzer, and
Williamson,, 2019).
Assumption of miller approach
Perfect capital market: Business organization run in perfect capital market where investor able
to perform reasonably information are generously move and deal and floatation cost do not
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exist . Prefect capital market can be defined as a market where no shareholder is large enough to
influence the marketplace worth of a share.
No tax: Tax does not exist there are no differences in tax rate applicable to capital gain and
dividend.
Policy of investment: Business organization have a fixed policy of investment.
No risk: Risk of uncertainty does not exist
Determination of value of share
NP0 = (n+m)P1 – (I- E)/ 1+ ke
N = share issued number.
I = Required investment.
E = Total revenue of the organization
P1= Market price per share
Ke: Cost of equity capital
N= Outstanding shares number at initial level
D1 : Dividend
nPo = Value of firm
Tesco dividend policy
It refers as strategy formulated for distributed earnings to shareholders as dividend.. This tool of
corporate fiancé implies that business organizations with the help of their board select a method
of dividend payment’s. The department of management must be developed a surplus policy
which divides net earning into surplus and reserved earnings in an optimal way so as to
accomplish the aim of prosperity maximization for investor (De Cesari, Gonenc, and Ozkan,
2016).
TESCO is one of the multination organizations of UK, it provides dividend policy on regular
basis to their shareholders. They provides dividend to their investor at useful rate. For this
purpose organization created some reserve to pay fixed amount of dividend in the year when the
earnings of the company is not enough. They provides stable dividend and when their earning is
goes high they also provides external dividends to their shareholder. But few last year due to
unstable economic condition in UK< BREXIT agreement and resection repaid, TESCO was
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unable to give dividend in 2017 and half of 2027 .But they again distribute dividend to their
shareholder at 1 per share rate in last month of 2017.TESCO made dividend policy for their
future to provides dividend on various basis to their shareholder but due to COVID 19 pandemic
organization unable to generate profit and it will be negatively impact on dividend policy. But
they have cash as well as bonus share as dividend to their shareholder.
Decision regarding dividend
Every stockholder have different perception re3garding dividend policy of organization their
though are differ from each other as their level of interest, investment of capital and needs
and wants are different from each other. Shareholder, financial institution who invest higher
capital in the organization will be expect to higher earning return as they though for their
future return. On the other side small investor does not impacted on the decision on dividend
of the organization as they did not invest high amount in the organization. Creditors,
supplier also take interest in company as dividend policy shoe the profitability rate of
organization which will show the capacity of fulfilling liability of long term loans of the
organization. Thus every stakeholder have different objective and perception regarding
dividend policy. /manager of company formulate policy of dividend on the basis of their
demands and level of satisfaction (Kim and Li, 2014).
CONCLUSION
From the above analysis it has been concluded that dividend is essential part of an
organization. This term is related with distribution of part of income from profits to relevant
shareholder. It is a symbol of profitability status of business organization. Thus decision
taken related to dividend consider all the relevant factor, dividend payout ratio, yield ratio
can be computed by sung various theories and models of dividend through which manager
can easily calcite amount of profit distributed to shareholder. Theses polices also provides
help to increasing value of company between shareholder as well as it also attract investor
thus a relevant dividend policy is essential for organization to maintain their sustainability in
market area.
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