As of June 2004, Microsoft’s quarterly dividend was four measly cents per share.
ID: 2427620 • Letter: A
Question
As of June 2004, Microsoft’s quarterly dividend was four measly cents per share. With $50 billion of cash on hand, on July 20th of that year, the company announced a one-time “special dividend” of $32 billion, or $3 per share. Should the Microsoft investors have been happy that they were to be receiving gobs of cash in the form of this special dividend? Seems like a funny question. Is winning the lottery a good thing? Am I better off getting a bonus, or not? Unlike these windfalls, shareholders receiving dividends are simply getting what is already theirs. Before receiving the dividend check, they already owned that cash, because they own everything of the company's. "Wait!" you say. "Didn't we discuss that receiving a dollar today is more valuable than receiving it in the future?" Indeed, it is, but... that's if you are comparing having a dollar today, which you could invest and earn some rate of return on, versus receiving just one dollar in the future. That's not what we're talking about in the dividend decision. If you, the shareholder, get the dividend now, you'll invest it in something or other, and earn some investment return. Conversely, if you do not get the dividend now, this company will retain the funds and invest them in the company's activities, and (presumably) earn some investment return. How do you feel now about the Microsoft dividend?
Explanation / Answer
Answer:
Normally, the amount of a companies's retained earnings is the cumulative net income since the company began minus all of the dividends that the company has declared since it began. The amounts are recorded in the Retained Earnings account, which is reported in the Stockholders' Equity section of the companie's balance sheet.
While the amount of retained earnings is reported in the stockholders' equity section of the balance sheet , the retained earnings are probably invested in assets that are also reported on the balance sheet.
The Retained Earnings amount is clearly reported as part of Stockholders' Equity, but the amount is usually invested in assets or used to reduce liabilities. Rarely will the retained earnings be entirely in cash. The retained earnings need to be invested in income producing assets or in the reduction of liabilities in order to earn a return for the stockholders, who have opted to reinvest their earnings in the company.
Following are the cases to take the decision of share holder opt for retain the company earnngs or pay dividend.
If the share holders getting return on amount of dividend paid by the company to invest else where, but the company is earnings or growing the amount of retained earnings invested as certain source of funds.
So, microsoft, is earnings certain return on retained earnings, invester will feel happy to even non payment of dividend as the company earnings return on retained earnings.
Following are the theories of dividend payment of a company as the company when to pay dividend and at what amount is to be paid:
Walter’s model:Walter’s model of share valuation mixes dividend policy with investment policy of the firm. The model assumes that the investment opportunities of the firm are financed by retained earnings only and no external financing debt or equity is used for the purpose when such a situation exists either the firm’s investment or its dividend policy or both will be sub-optimum. The wealth of the owners will maximise only when this optimum investment in made.
Gordon’s Model: According to Gordon’s dividend capitalisation model, the market value of a share ) is equal to the present value of an infinite stream of dividends to be received by the share. it assumes that company has growth and therse growth will be through retained earnings. growth rate is always less than cost of equity.
Modigliani and Miller’s hypothesis: According to Modigliani and Miller, dividend policy of a firm is irrelevant as it does not affect the wealth of the shareholders. They argue that the value of the firm depends on the firm’s earnings which result from its investment policy.
Thus, when investment decision of the firm is given, dividend decision the split of earnings between dividends and retained earnings is of no significance in determining the value of the firm.
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