Dividend policy is concerned with taking a decision regarding paying cash dividend in the present or paying an increased dividend at a later stage. The firm could also pay in the form of stock dividends which unlike cash dividends do not provide liquidity to the investors, however, it ensures capital gains to the stockholders. The expectations of dividends by shareholders helps them determine the share value, therefore, dividend policy is a significant decision taken by the financial managers of any company.
|Contents | |1 Concept | |2 Relevance of dividend policy | |2.1 Walter's model | |2.1.1 Assumptions of the Walter model | |2.1.2 Model description | |2.1.3 Mathematical representation | |2.1.4 Criticism | |2.2 Gordon's Model | |2.2.1 The Assumptions of the Gordon model | |2.2.2 Model description | |2.2.3 Mathematical representation | |2.2.4 Conclusions on the Walter and Gordon Model | |2.3 Capital structure substitution theory & dividends | |2.3.1 Mathematical representation | |2.3.2 Conclusion | |3 Irrelevance of dividend policy | |3.1 Residuals theory of dividends | |3.1.1 Extension of the theory | |3.1.2 Conclusion | |3.2 Modigliani-Miller theorem | |3.2.1 Assumptions of the MM theorem | |3.2.2 Model description | |4 See also | |5 External links | |6 References |
Coming up with a dividend policy is challenging for the directors and financial manager a company, because different investors have different views on present cash dividends and future capital gains. Another confusion that pops up is regarding the extent of effect of dividends on the share price. Due to this controversial nature of a dividend policy it is often called the dividend puzzle. Various models have been developed to help firms analyse and evaluate the perfect dividend policy. There is no agreement between these schools of thought over the relationship between dividends...