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For and Against the Irrelevance of Dividend Policy - Essay Example
Finance & Accounting
Pages 8 (2008 words)
For and Against the Irrelevance of Dividend Policy University Dividend Policy Dividend Policy is regarded as the clear or embedded decision of a corporation’s Board of Directors with respect to the extent of available income which is supposed to be allocated among the shareholders of the corporation (Kimmel et al, 2010)…
When earnings are dispensed as dividends, the company is deprived of funds which are needed for augmentation and development, and this might result in the company looking for supplementary capital from external sources. Firms are not legally required to pay dividends to stockholders. Similarly, the stockholders cannot officially compel the Board of Directors to declare dividends. In addition to that, even courts cannot meddle in this affair (Kapil, 2011). Arguments For Dividend Irrelevance In the year 1961, two senior professors, Franco Modigliani and Merton Miller (M&M) stated that a firm’s value has no correlation with its dividend policy. According to them, the market value of a company is decided only by the actions pertaining to investment and operations that result in cash flows. The structure of capital and policies related to dividends are simply financing actions or in other words, purely the ways in which cash flows from operations are allocated among the investors. Modigliani and Miller were awarded Nobel Prizes for this exclusive effort concerning Accounting and Financing. The M&M proposal gave birth to scholarly analysis in the field of finance and accounting. ...
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