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. Since their attempt, numerous researchers in economics, finance and accounting have come up with various models and theories to explain the irrelevance and relevance of dividends to the market value of the company. Besides the M&M Theory proponents known as Middle of the Roaders; there exist Rightist and Radical Left groups with their own viewpoints (Brealey, 2007). Residual Theory states that if a company is not capable of investing further to earn in surplus of its capital expenditure, then it should apportion the earnings among the stockholders. Over the years, the evolution of M&M Theory has propagated the notion that a company’s dividend policy is irrelevant to its market value. The major argument stated by the M&M theorists is that the investment strategy is the most important determinant of a company’s market value, while the division between the dividends and the reinvestments does not have an effect on this value. However, this explicit suggestion has been made under certain assumptions (Baker et al, 2005). These assumptions largely entail capital markets which are perfect with no taxes and a steady interest rate in the market with limitless borrowing. The clients or potential investors who come with money are varied in terms of preferences for low disbursement and high disbursement demand for dividends. The proponents of dividend irrelevance emphasize on this point, elucidating that policy changes with regard to high or low disbursements of dividends, affects the clientele or the investors that the company will influence, not its value. Though research illustrates that major alterations in dividends somehow affect stockholder prices. However, the response of the proponents of dividend irrelevance is that the influence on the prices is associated with the informational substance of dividends in relation to potential earnings instead of the dividend itself. It is the inclination in the preferences of the investors that results in modifications of prices. Another argument in the support of dividend irrelevance is the fact that most investors are little affected whether or not dividends are paid as they know that if dividends are not paid, then the earnings are reinvested which ultimately
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)…
The assumption is that dividends not paid are reinvested by the company to generate more profit, thus higher stock values” (Dividend Irrelevance Theory n.d.). Different scholars have different opinions regarding dividend irrelevance and dividend relevance.
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.
This means that the primary role of such a policy is to determine the proportion of the company’s funds, which should be paid to the shareholders and what should be set aside for investment in new opportunities. In order to determine this policy, managers of firms must consider the options that would lead to optimisation of the shareholders’ wealth.
One of the best ways to enhance shareholders' value is to build a consistent dividend policy over the years that could create value addition to the Company and ensure shareholder loyalties by consolidating and building up its position in the turbulent high waters of competitive business operations
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).
pany uses to determine the amount of funds that should be retained for reinvestment in new projects and the amount of dividend that should be paid out to the shareholders. This means that the primary role of such a policy is to determine the proportion of the company’s funds,