Some argue that dividend policy will not affect the wealth of the shareholders, whereas some have the opinion that the decisions about dividend policy will affect the shareholder’s wealth and the firm’s valuation. “Dividend policy refers to the decision regarding the magnitude of the dividend payout, the percentage of earnings paid to the stockholders in the form of dividends. The central, and as yet unresolved, issue concerning dividend policy is whether changes affect firm value” (Dividend Policy 2012). Following are the factors which influence the dividend policy: • Market deficiency for example taxes, agency costs, asymmetric information, flotation costs and transaction costs. • Behavioral considerations for instance illogical shareholder behavior, behavioral desires of shareholders and usual behaviors of firms. • Industry characteristics for example profitability, size, investment opportunities, availability of cash on probable cash flows and future earnings. • Managerial likings for example smoothing of dividends and the disinclination to decrease future dividends. Arguments for the Dividend Irrelevance: Dividend Irrelevance is a theory that an organization’s strategy of dividend has no actual influence on the value of the company. “The main cause for paying or not paying dividends is the cost of tax. Though dividend irrelevance is not absolutely accurate, it is a superior adequate estimate to the certainty that basic assessment should usually do not take into account strategy of dividend” (Expert 2012). The enduring assumption of dividends involves with the aim that if the organization cannot spend its income to make a revisit that is more than expenditure, it must deliver the income by paying dividends to shareholders. “The theory of dividend irrelevance is founded on the basis that an organizations dividend strategy is sovereign of the value of its share value, in addition to the dividend choice is an inactive residual. The price of the organization is resolved by its financing and investment decisions in a best capital formation, and not by its decision of dividend. A general policy of dividend should provide every industry its value of shares, as the policy of dividend is irrelevant in resolving the value of the firm” (Barman n.d., p. 17). This method suggests that dividends symbolize earnings residual more willingly than a dynamic decision variable that influences the organization’s worth. Such a vision is reliable with the theory of dividend irrelevance put forward by the authors Merton H. Miller and Franco Modigliani. “The authors argue that the industries value is ascertained only by the earning risk and authority of its resources, and that the way in which it divides its earnings stream among dividends and internally maintained funds, does not influence this cost. The big variations in dividends increased the value of share. When there is an increase in the dividend, the share prices also get increase and when the dividend decreases, the share price gets reduced” (Gitman 2008, p. 513). An organization fascinates investors whose liking for the stability as well as payment of dividends match with an organization’s solidity of dividends and actual payment pattern. The shareholders wish for constant dividends on the basis of
Discuss the Proposition that a Company's Dividend Policy is Irrelevant to its Market Value Dividend irrelevance theory basically signifies that an issuance of dividends must have little or no impact on stock price. This theory is “A postulation that the dividend policy of a company should have minimal effect on the investment decisions made by an investor due to the fact that the payment or non-payment of a dividend will not necessarily impact the net return to the investor…
DIVIDEND POLICY Name Professor’s name Course Date Dividend is the payments that are given to the shareholders from the profits or reserves of a company. In the case of Associated British food company plc, the shareholders have experienced increasing dividends in the last four years.
There are several theories that explain the aspect of irrelevance of dividend policy to the rational investors. The rational investors are concerned with the maximization of their wealth which forms the basis of the company’s objective. In order to accomplish those objectives, the companies adopt different policies and strategies for implementation.
Basic facilities like water, electricity, food and shelter should be sufficient. Real estates prices will increase when the land is in the center of the city, or in industrial areas, or in residential areas. Infrastructure of the city or town plays an important role because those are the basic amenities that an investor would look into, before buying the land.
The dividend policy of the firm is determined by the fact that the manager's depression to influence the capital structure of the firm by leveraging would allow him to independently act by increasing debt thus reducing equity. Therefore the basis of the dividend policy itself is determined by the manager's ability to manipulate the capital structure of the firm.
Weighted average cost of capital is a measure used to calculate the amount of debt that a firm holds against the amount of equity. However it’s much better to put it this way it’s a measure of the amount of debt that a firm should hold against the amount of equity.
ls.(Frankfurter 2002).The third view is that firm dividend policy is irrelevant in stock price valuation. (Frankfurter 2002.These views are best summed up as being based upon, the tax effect ( Litzenberger and Ramaswamy (1980),)Clientele effects explanations (Elton and Gruber, 1970), Agency theory explanations(Easterbrook 1984), Signaling models(John and Williams (1985), and psychological/sociological explanations ( Frankfurter and Lane 1992).
Stockholders have certain requirements that need to be taken into consideration in determining dividend policy or formulation of an appropriate dividend structure.
Arriva is the one of the biggest names in the transport service business in the
The author states that within the modern business environment, small enterprises are still using complicated and puzzling means for inventory management. They lack economical and easy in use solutions and need an implemented database that would allow customizing the data with no programming or other related knowledge.
Dividend is the amount that a company pays annually or semi-annually to the shareholders out of its profit (Michaely and Roberts, 2012). However, there are certain guidelines which decide the payment of the earning to the shareholders, these set of guidelines is known as dividend policy.
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