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Q: What is the significance of a dividend policy to a firm?
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Which are the fluctuating dividend policies?

this policy is that policy which is fluctuating in nature and the shareholders do not generally go for this dividend policy.


What is modigliani miller hypothesis?

Quoted from Wikipedia: "The basic theorem states that, in the absence of taxes, bankruptcy costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. It does not matter if the firm's capital is raised by issuing stock or selling debt. It does not matter what the firm's dividend policy is. Therefore, the Modigliani-Miller theorem is also often called the capital structure irrelevance principle."


What is divident policy?

DividendsDividends are payments made to stockholders from a firm's earnings, whether those earnings were generated in the current period or in previous periods. Dividend PolicyOnce a company makes a profit, management must decide on what to do with those profits. They could continue to retain the profits within the company, or they could pay out the profits to the owners of the firm in the form of dividends.Once the company decides on whether to pay dividends they may establish a somewhat permanent dividend policy, which may in turn impact on investors and perceptions of the company in the financial markets. What they decide depends on the situation of the company now and in the future. It also depends on the preferences of investors and potential investors.


What are the assumptions of MM approach?

The MM approach to irrelevance of dividend is based on the following assumptions:· The capital markets are perfect and the investors behave rationally.· All information is freely available to all the investors.· There is no transaction cost.· Securities are divisible and can be split into any fraction. No investor can affect the market price.· There are no taxes and no flotation cost.· The firm has a defined investment policy and the future profits are known with certainty. The implication is that the investment decisions are unaffected by the dividend decision and the operating cash flows are same no matter which dividend policy is adopted.The modelUnder the assumptions stated above, MM argue that neither the firm paying dividends nor the shareholders receiving the dividends will be adversely affected by firms paying either too little or too much dividends. They have used the arbitrage process to show that the division of profits between dividends and retained earnings is irrelevant from the point of view of the shareholders. They have shown that given the investment opportunities, a firm will finance these either by ploughing back profits of if pays dividends, then will raise an equal amount of new share capital externally by selling new shares. The amount of dividends paid to existing shareholders will be replaced by new share capital raised externally.In order to satisfy their model, MM has started with the following valuation model.P0= 1* (D1+P1)/ (1+ke)Where,P0 = Present market price of the shareKe = Cost of equity share capitalD1 = Expected dividend at the end of year 1P1 = Expected market price of the share at the end of year 1With the help of this valuation model we will create a arbitrage process, i.e., replacement of amount paid as dividend by the issue of fresh capital. The arbitrage process involves two simultaneous actions. With reference to dividend policy the two actions are:· Payment of dividend by the firm· Rising of fresh capital.With the help of arbitrage process, MM have shown that the dividend payment will not have any effect on the value of the firm. Even if the firm pays dividends, resulting in a increase in market value of the share, the effect on the value of the firm will be neutralised by the decrease in terminal value of the share.


What is the dividend of ninety seven by sixty?

The dividend is 97.The dividend is 97.The dividend is 97.The dividend is 97.

Related questions

What is small constant dividend per share plus extra dividend policy?

A policy of paying a low regular dividend plus a year-end extra in good years is a compromise between a stable dividend and a constant payout rate.This policy gives the firm flexibility.


Mm hypothesis ofdivdend irrelevance policy?

M-M HYPOTHESIS is irrelevent theory because the value of firm does not depend on the dividend policy formulated by the firm.


What are the two fundamental questions in dividend policy?

the amount of growth the firm considers optimal and determining the protion of earnings to be paid out


What is the concept of dividend policy in multinational firms?

concept of dividend policy


Which are the fluctuating dividend policies?

this policy is that policy which is fluctuating in nature and the shareholders do not generally go for this dividend policy.


What is dividend policy?

nd policy


The difference between a passive and an active dividend policy.?

The difference between a passive and an active dividend policy lies in the amount of time between dividend disbursement. In a passive dividend policy, dividends are given when the company decides it is time. With an active dividend policy, dividends are disbursed at regular intervals.


Definition of stable dividend policy?

Dividend policy is a set of rules that a company uses to determine how much of its earnings it will pay to shareholders. Stable dividend policy means all payments are equal.


What are the difference between relevance and irrelevance theory of dividend?

The relevance theory of dividends suggests that dividends impact a firm's value, investor preferences, and information signaling. In contrast, the irrelevance theory of dividends proposes that dividend policy does not affect a firm's value because investors are indifferent between dividends and capital gains.


How do you envisage your role as a Finance Manager in matters related to dividend policy What are the alternatives and factors that you may consider before finalizing your views on dividend policy?

as finance manager what is your role in matter of dividend policy.


What are the 3 major theory of dividend policy?

Residual Theory of dividend policyThe essence of the residual theory of dividend policy is that the firm will only pay dividends from residual earnings, that is, from earnings left over after all suitable (positive NPV) investment opportunities have been financed. Retained earnings are the most important source for financing for most companies. A residual approach to the dividend policy, as the first claim on retained earnings will be the financing of the investment projects. With the residual dividend policy, the primary focus of the firm's management is indeed on investment, not dividends. Dividend policy becomes irrelevant, it is treated as a passive rather than an active, decision variables. The view of management in this case is that the value of firm and the wealth of its shareholders will be maximized by investing the earnings in the appropriate investment projects, rather than paying them out as dividends to shareholders. Thus managers will actively seek out, and invest the firm's earnings in, all acceptable (in terms of risk and return) investment projects, which are expected to increase the value of the firm. Dividends will only be paid when retained earnings exceed the funds required to finance the suitable investment projects. Conversely when the total investment funds required exceed retained earnings, no dividend will be paid.Motive for a residual policyThe motives for a residual policy, or high retentions, dividend policy commonly include:A high retention policy reduces the need to raise fresh capital, (debt or equity), thus saving on associated issues and floatation costs.A fresh equity issue may dilute existing ownership control. This may be avoided, if retentions are consistently high.A high retention policy may enable a company to finance a more rapid and higher rate of growth.When the effective rate of tax on dividend income is higher than the tax on capital gains, some shareholders, because of their personal tax positions, may prefer a high retention/low payout policyDividend Irrelevancy TheoryDividend irrelevancy theory asserts that a firm's dividend policy has no effect on its market value or its cost of capital. The theory of dividend irrelevancy was perhaps most elegantly argued by its chief proponents, Modigliani and Miller (usually referred to as M&M) in their seminar paper in 1961. They argued that dividend policy is a "passive residual" which is determined by a firm's need for investment funds.According to M&M's irrelevancy theory, if therefore does not matter how a firm divides its earnings between dividend payments to shareholders and internal retentions. In the M&M view the dividend decision is one over which managers need not agonies, trying to find the optimal dividend policy, because an optimal dividend policy does not exist. M&M built their dividend irrelevancy theory on a range of key assumptions, similar to those on which they based their theory of capital structure irrelevancy. For example they assumed:Perfect Capital markets, that is there are no taxes, (corporate or personal), no transaction costs on securities, investors are rational, information is symmetrical - all investors have access to the same information and share the same expectations about the firm's future as its managers.The firm's investment policy is fixed and is independent of its dividend policy.The Bird-In-The-Hand TheoryThe essence of the bird-in-the-hand theory of dividend policy (advanced by John Litner in 1962 and Myron Gordon in 1963) is that shareholders are risk-averse and prefer to receive dividend payments rather than future capital gains. Shareholders consider dividend payments to be more certain that future capital gains - thus a "bird in the hand is worth more than two in the bush".Gorden contended that the payment of current dividends "resolves investor uncertainty". Investors have a preference for a certain level of income now rather that the prospect of a higher, but less certain, income at some time in the future.The key implication, as argued by Litner and Gordon, is that because of the less risky nature dividends, shareholders and investors will discount the firm's dividend stream at a lower rate of return, "r", thus increasing the value of the firm's shares.According to the constant growth dividend valuation (or Gordon's growth) model, the value of an ordinary share, SV0 is given by:SV0 = D1/(r-g)Where the constant dividend growth rate is denoted by g, r is the investor's required rate of return, and D1, represents the next dividend payments. Thus the lower r is in relation to the value of the dividend payment D1, the greater the share's value. In the investor's view, according to Linter and Gordon, r, the return from the dividend, is less risky than the future growth rate g.M&M argued against this and referred to it as the bird-in-the-hand fallacy. In their irrelevancy model, M&M assume that the required rate of return or cost or capital, r, is independent of dividend policy. They maintain that a firm's risk (which influences the investor's required rate of return, r) is a function of its investment and financing decisions, not its dividend policy.M&M contend that investors are indifferent between dividends and capital gains - that is, they are indifferent between r and g is the dividend valuation model. The reason for this indifference, according to M&M, is that shareholders simply reinvest their dividends in share of the same or similar risk companies.Dividend Signaling TheoryIn practice, change in a firm's dividend policy can be observed to have an effect on its share price - an increase in dividend producing an increasing in share price and a reduction in dividends producing a decrease in share price. This pattern led many observers to conclude, contrary to M&M's model, that shareholders do indeed prefer dividends to future capital gains. Needless to say M&M disagreed.The change in dividend payment is to be interpreted as a signal to shareholders and investors about the future earnings prospects of the firm. Generally a rise in dividend payment is viewed as a positive signal, conveying positive information about a firm's future earning prospects resulting in an increase in share price. Conversely a reduction in dividend payment is viewed as negative signal about future earnings prospects, resulting in a decrease in share price.DIVIDEND AS A RESIDUALThere is school of thought which regards dividends as a residual payment. They believe that the dividend pay-out is a function of its financing decision. The investment opportunities should be financed by retained earnings. Thus internal accrual forms the first line of financing growth and investment. If any surplus balance is left after meeting the financing needs, such amount may be distributed to the shareholders in the form of dividends. Thus, dividend policy is in the nature of passive residual. In case the firm has no investment opportunities during a particular time period, the dividend pay-out should be 100%.A firm may smooth out the fluctuations in the payment of dividends over a period of time. The firm can establish dividend payments at a level at which the cumulative distribution over a period of time corresponds to cumulative residual funds over the same period. This policy smoothens out the fluctuations of dividend pay-out due to fluctuations in investment opportunities.


Can you pay dividends from contributed capital?

Dividends are deducted of the retained earnings which is part of the contributed capital and that must be done according to the dividends policy The dividend policy of a firm relates to management's propensity to distribute earnings to stockholders.