What is Equity Capital? How to calculate Dividend Yield and Dividend Payout Ratio?

Equity Capital / Share Capital: The fund is required to start a business which is known as Capital. The Capital is divided into small units and each unit is called share or equity.

·         The shares give the voting right to the share holders in a company. The shareholder has a right to select a person who represents them in a board meeting of a company.

·         

Types of Shares:

Authorised Share Capital	It is a maximum share capital which a company can issue to investors or public.
Issued Share Capital	It is a part of authorized capital which is actually issued to the general public.
Subscribed Share Capital	It is a part of issued share capital which is subscribed by a public.
Paid-up Share Capital	An amount receives by company through investors in response of giving Company shares to them.
Right Issue Share	A company issues additional shares to the existing shareholders for specified period at specified price. It gives additional rights.
Bonus Share	If the company has surplus profit, after it had paid the dividends to the shareholders. It can distribute that surplus to the shareholders in the form of bonus shares.
Sweat Share	These shares issue to employees or directors of a company at discount on market price or for consideration other than cash.

Face Value	The value mention on share certificate is known as face value or Par.
Book Value	The value of share mention on accounting book.
Premium	It is an additional amount pay or receives on face value of share.
Underwriter	The person who subscribes remaining shares after public subscription is known as underwriter.
Broker	A person who makes a deal between buyer and seller of shares.
Promoter	A person, firm or group of people who helps to establish a company by completed all legal formalities.

Dividend Yield: It provides the information of a company’s ability to pay its shareholders dividend. It is a ratio of dividend given by a company by dividing with stock price.

Dividend Yield = Annual Dividend per share/ Current Stock price per share

Dividend Payout Ratio: It provides information about how much portion of a company’s income is pay to the shareholders in the form of dividend.

Dividend Payout Ratio = Annual Dividend / Net Income

                                      OR

Dividend Payout Ratio = Dividend per share / Earnings per share

Example: Company X declares dividend of Rs.4 per share and the face value of the share is Rs.10.Mr. Mohan have 400 shares of Company X and the current price of the share is Rs.15. Find out the dividend yield of a company.

Solution: Dividend Yield = Annual Dividend per share / Current Stock price per share

= 4 / 15

=27%

Example: Company A and B has declare their dividend of Rs.5 and Rs.2 respectively. Current market price of shares of company A and B are Rs.30 and Rs.40 respectively. Find out the dividend yield.

Solution:

Dividend Yield	Company A	Company B
= Annual Dividend per share / Current Stock price per share	5/30 =17%	2/40 =5%

Interpretation: Dividend yield ratio shows that Company A has more ability to pay dividend to its shareholders in comparison to Company B.

Example: Company Y expected growth in dividend @ 2% after 2 years and the current market price of a share is Rs.80. The expected return is 9% Find out the expected dividend and dividend yield ratio.

Solution:

K_e = (D₁ /P₀) + g

OR

K_e = Expected dividend yield (D₁ /P₀) + Expected Capital gain (g)

K_e = Expected return or cost of equity

D₁ = Expected dividend per share

P₀ = Current market price or net proceeds

G = growth rate

D₁ = (K_e*P₀)-g

= (0.09*80) – 0.02

= 7.18

Dividend Yield = 7.18/80

= 8.9%

OR

Expected dividend yield (D₁ /P₀) = K_e - Expected Capital gain (g)

= 0.09 – 0.02 = 0.07

= 7%

Example: Find out the dividend payout ratio when the company C issues 40,000 shares. With the help of following information:

·         EBIT =Rs. 25,00,000

·         Debenture of Rs.8,00,000 @ 10%

·         Preference share of Rs.5,00,000 @ 7%

·         Current market price =Rs.60

·         Tax = 40%

·         Dividend per share Rs.6.5

Solution:

Particulars	Amount
EBIT	25,00,000
Less: interest	80,000
EBT	24,20,000
Less: tax	9,68,000
EAT	14,52,000
Less: preference shares dividend	35000
Earnings available for shareholders	14,17,000
Earnings per share	35.42
Dividend payout ratio = Dividend per share / Earnings per share	6.5 / 35.42 =18%

Example: Company declares dividend of Rs.2, 00,000 today and if it expected 2% growth in dividend after 2 years. Find out the expected dividend payout ratio. The expected net income of company is Rs.15, 00,000.

Solution: Dividend payout ratio = Dividend per share / Earnings per share

= 2, 04,000 / 15, 00,000

=13.6%