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Financial Policies and the Value of the Firm
Finance & Accounting
Pages 14 (3514 words)
Name: Instructor: Course: Date: Financial Policies and the Value of the Firm Literature Review Irrelevance of Financial Policy Miller and Modigliani (1961) considered 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.
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 (1974) 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 (1974) 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. Stiglitz (1974) suggested that it is possible to place the decisions that a firm makes into four groups: i. the way in which investment is financed; ii. the way in which revenue is distributed; iii. ...
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