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    Dividend Theories and Limitations

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    Perah Memon
    The document summarizes several dividend theories and their limitations: - Walter's model ties dividend policy to investment policy but assumes constant rates of return and cost of capital. Gordon's model shows how dividends increase shareholder wealth but assumes constant discount and return rates. Modigliani-Miller finds dividend policy irrelevant to shareholder wealth under perfect market assumptions. However, all models make unrealistic assumptions about constant rates and lack of taxes, risk, or debt financing.

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    Dividend Theories and Limitations

    Uploaded by

    Perah Memon
    71 views11 pages
    The document summarizes several dividend theories and their limitations: - Walter's model ties dividend policy to investment policy but assumes constant rates of return and cost of capital. Gordon's model shows how dividends increase shareholder wealth but assumes constant discount and return rates. Modigliani-Miller finds dividend policy irrelevant to shareholder wealth under perfect market assumptions. However, all models make unrealistic assumptions about constant rates and lack of taxes, risk, or debt financing.

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    different theories that are differentiated on the basis of dividend and value of the firm.

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    dividend theories and limitations

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    The document summarizes several dividend theories and their limitations: - Walter's model ties dividend policy to investment policy but assumes constant rates of return and cost of capital. Gordon's model shows how dividends increase shareholder wealth but assumes constant discount and return rates. Modigliani-Miller finds dividend policy irrelevant to shareholder wealth under perfect market assumptions. However, all models make unrealistic assumptions about constant rates and lack of taxes, risk, or debt financing.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    71 views11 pages

    Dividend Theories and Limitations

    Uploaded by

    Perah Memon
    The document summarizes several dividend theories and their limitations: - Walter's model ties dividend policy to investment policy but assumes constant rates of return and cost of capital. Gordon's model shows how dividends increase shareholder wealth but assumes constant discount and return rates. Modigliani-Miller finds dividend policy irrelevant to shareholder wealth under perfect market assumptions. However, all models make unrealistic assumptions about constant rates and lack of taxes, risk, or debt financing.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 11

    Dividend theories and

    limitations
    Submitted to : Dr. Arifa Bano Talpur
    Submitted by: Perah Memon
    1918smbanbs12
    Walters model
    • Walter’s model states that the choice of dividend policy always affects the value of
    shareholders.
    • Walter’s model clearly describes the relationship between firm’s internal rate of return
    (r) and cost of capital (k), which determines the dividend policy to increase the wealth
    or shareholders.
    assumptions
    • The retained earnings are the only source of financing investments in the firm, no debt
    or new equity issued.
    • The rate of return and cost of capital are always constant.
    • The firms life endless or infinite.
    • All earnings are again invested internally or distributed.
    • The value of earnings and dividends always remain constant in determining a given
    value.
    problems
    • The Walter's model blends dividend policy with investment policy of a firm.
    • Walters model assume that r is constant but it decreases when investment increases.
    • Walters model assumes that k remains constant but it increases or decreases with the
    firm’s risk.
    Gordon’s model
    • Gordon’s model states that the choice of dividend policy always affects the value of the
    firm.
    • Gordon’s model shows how dividend policy is used to increase the wealth of
    shareholders.
    • The main proposition is that the value of a share reflects the value of future dividends
    accruing to that share.
    • The share market price is equal to the sum of share’s discounted future dividend
    payment.
    assumption
    • The firm is in all equity firm and no external finance is available.
    • The discount rate (k) and internal rate of return (r) remains constant.
    • There are no corporate taxes.
    • The firm has perpetual life.
    • The retention ratio (b) once decided remains constant and growth rate g=br always
    remains constant.
    • If k> g=br, cost of capital is greater than growth rate, then we can get significant value
    for the share.
    problems
    • Gordon model assume that there is no debt and equity finance used by the firm but it is
    not applicable to present day business.
    • Ke and r cannot remain constant in real time.
    • It is not practically applied, there are no corporate tax paid by the firm.
    Modigliani and miller’s approach
    • The Modigliani-Miller theorem (M&M) states that the dividend policy of a firm is
    irrelevant as it does not affect the wealth of the shareholders. They argue that the value
    of the firm depends on the firm’s earnings which result from its investment policy.
    • the split of earnings between dividends and retained earnings is of no significance in
    determining the value of the firm.
    assumption
    • There is always perfect capital market.
    • The investors are rational.
    • There are no taxes applicable
    • The firm has fixed investment policy.
    • No risk or uncertainty.
    problems
    • It is not practically applied, there are no corporate tax paid by the firm.
    • There is always a space for risk and uncertainty.
    • It assumes that investors behave rationally
    THANK YOU

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