The Assessment of Dividend Policy on Value of a Firm

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AN ASSESSMENT OF DIVIDEND POLICY ON
THE VALUE OF A FIRM
(A CASE STUDY OF FIRST BANK OF NIGERIA PLC)

BY

ABANIWONDA RILWAN ADEYEMI
MATRIC NO:

TABLE OF CONTENT

ABSTRACT

CHAPTER ONE

1.0 Introduction
2.1 Statement of problem
2.2 Objectives of the study
2.3 Research Questions
2.4 Research Hypothesis
2.5 Significance of the study
2.6 Scope and Limitations of the study
2.7 Definition of Terms
2.8 References

ABSTRACT

There has been on-going debate over decades among academicians and practitioners regarding the relevance of dividend decision in the valuation of a firm. The research work seeks to bring into limelight the assessment of dividend policy on the value of a firm.

Various dividend theories (relevance and irrelevance) were reviewed alongside their assumptions and criticisms. Theory of share price and practice in Nigerian economy were also discussed.

Data were sourced from both primary and secondary data and analysis was made from the Annual Reports and Accounts of First Bank of Nigeria Plc from 1997- 2006.

The Pearson Product Moment Correlation Coefficient (PPMCC) was employed in analyzing the data and tested using the “t” distribution test and it was discovered that dividend has a significant impact on the determination of the value of a firm.

It was suggested based on the findings in this study that management of companies should focus on adoption of stable dividend policy in order to resolve uncertainty in the minds of shareholders and to effectively and efficiently increase their wealth maximization of stock price.

Also, in order for companies to compete favorably in the turbulent business environment, technology-driven innovation and invention should be embarked upon. This is to ensure that companies tap all available investment opportunities and overcome all threats in the environment.

CHAPTER ONE

1.0INTRODUCTION

Financial, Investment and Dividend decision are the basic components of corporate financial management policy. Dividend decision deals with the periodic determination of proportion of a firm’s total distributable earnings that is payable to its ordinary shareholders, the larger the dividend paid, the less funds are retained for re-investment and the company has to rely on other sources of long term fund ( such as additional issue of equity or debt capital) to finance its projects.

Dividend, being the return to shareholders for a given period is a very relevant factor in the determination of the value of the firm. While some schools of thought view it as less active (i.e passive), some view it as an active decision that has a significant role on the value of the firm.

In developed countries, the decision between dividend payment and retained earnings has been taken seriously by both investors and management and has been the subject of financial economist in the last five decades. The decision to retain, re-invest or pay out after tax earnings in form of cash or stock dividend is important for the realization of corporate goal which is the maximization of the value of the firm.

The role of the financial manager therefore, is to strike a balance dividend payout and retention of earnings. This is a very difficult task because shareholders have different and conflicting objectives – heterogeneous expectations.

Dividend policy is extremely important because of its effect on share values: a stable dividend policy is expected to lead to a higher share price because of greater confidence of investors about future prospects of the company (Akinsulire 2005).

Dividend policy determines the division of earnings between payment to shareholders and re-investment in the firm. Retained earnings are one of the most significant sources of fund for financing corporate growth, but dividend constitutes the cash flow that accrues to stockholders.

1.1 STATEMENT OF THE PROBLEM

Dividend is described...
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