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Dividend Policy At SRF Limited Buyback Of Shares Case Solution

Solution Id Length Case Author Case Publisher
1818 1022 Words (4 Pages) Kulbir Singh, David J. Sharp, S. Ramanna Vishwanath Ivey Publishing : W17382
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The company consecutively repurchased shares in 2006 to 2011. It repurchased twice and its request was rejected the third time. However, it tried the fourth time and succeeded, which brought its total number of buybacks to three. However, there was a strategy behind the share buybacks. First, the company’s fast-paced expansion resulted in expansion of its business, and consequently, shareholders. It resulted in both the share capital and the reserves going up, resulting n dilution of shareholding. Hence, share buyback was arranged to buyback the shares currently floating in the market, so ownership could be saved from dilution. Secondly, share buyback would benefit the Earning per Share (EPS) of the company. A higher number of shares was bringing down the EPS of the company. The share repurchases resulted in the EPS becoming INR 64.03 in 2011 from INR 15.57 in 2006. This hike was a result of both high net income, and a lower number of shares. Further, the company had excess cash lying as share premium, and also had high reserves. An effective way to use excessive money is to buy back shares, which benefits by reducing the number of shares in the market. 

Case Analysis for Dividend Policy At SRF Limited Buyback Of Shares

1. The growth of the business is related with the dividend payout ratio in a number of ways. Firstly, higher dividends would mean that the firm has a higher amount of cash available in its reserves due to higher profitability. Thus, a higher payout ratio in short term would make investors more confident in investing by buying the shares of the company. The increased volume for trading can in turn help in raising the market prices of the shares of the company. However, from another perspective which is a long term view, dividend payout is also an indication of how much money the firm is paying to its shareholders and how much is it retaining to finance growth through reinvestment, pay off debts, and increase its cash reserves. Hence, a higher payout ratio would mean that the firm has less amount available for capital investment, which could help the business grow in the long run. In addition, it has limited amount for debt repayments and to meet its liquidity needs, which can even cause it to go bankrupt. Thus, in such a case, the growth of the business and the dividend payout ratio are inversely related to each other, as the firm will have less cash available to go ahead with its future growth plans. 

2. There are six different forms of dividend. These include Cash dividend, special dividend, stock dividend, property dividend, scrip dividend and liquidating dividend. Cash dividend requires the actual payment of cash by the company to its shareholders. Special dividend also has a cash nature, however it is not recurring payment, hence it is declared as a separate from the natural dividend paying cycle. Stock dividend, however does not require actual cash payment as it involves giving additional shares to the shareholders without any consideration in the ratio of their initial investment. Property dividend is also a non cash dividend, in which the firm distributes its fair assets at the market value. The assets include physical assets, securities or real estate investments. Scrip dividend is also a non- cash dividend and acts like a promissory note to pay the dividends to the shareholders at a later date, if the firm does not have sufficient funds for dividend payment currently. Lastly, there is liquidating dividend and it is a cash dividend and is paid to the shareholders when the business is liquidating and it requires the firm to return the original capital investment of the shareholders.

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