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Financial Policies and the Value of the Firm - Literature review Example

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This research aims to evaluate and present the relationship of financial policies and the value of the firm. The researcher of this essay aims to pay special attention to irrelevance of financial policy and impact of investment on financing…

Extract of sample
Financial Policies and the Value of the Firm

The research identified that the matter of a firm’s dividend policy and its effect on current share prices. The effects of different dividend polices on current share prices based on assumptions of perfect capital markets, rational behaviour on the part of investors and perfect certainty. The assumption of perfect markets means that all traders have equal access to information and transaction costs such as brokerage fees and transfer tax which are normally associated with the sale and purchase of shares are non-existent. Rational behaviour indicates a preference for more instead of less and an indifference to the form that wealth takes – whether it is in the form of cash payments as dividends or increases in the market value of shares. Perfect certainty on the other hand indicates that investors have no doubt in relation to the investment and financial policy of the firm as well as the future levels of profitability of all firms. Stiglitz extends the argument that the financial policy of the firm is irrelevant to a multi-period model. The reason for this extension is to give consideration to a wider range of financial policies to include not only a debt to equity ratio but a dividend retention ratio, a debt maturity structure and possibly the holding of securities in other firms. While stressing the importance of financial policy on the value of the firm to students of finance, Stiglitz indicates that ‘if the conditions under which the “irrelevance” theorems obtain’ are considered to be realistic it results in a reduction in the tools that they require to function effectively. ...
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