ASSESSMENT Essay Example | Topics and Well Written Essays - 1250 words

ASSESSMENT - Essay Example Non-conventional types of dividend payments, particularly share repurchases are in most cases used currently, and therefore, the dividend decision is much more multifaceted and complex than it was in the past. In addition, there are more significant types of shareholders who should be satisfied today-particularly institutional investors-while managers once merely have to satisfy individual stockholders. Therefore, n increase in the dividend payout is taken to be good news. The company is showing that it not only has positive cash flows, however these cash flows are rising sufficiently to validate an elevated payout to shareholders. The company â€Å"proves† its cash flow by paying out some of that cash to its shareholders. This means that higher dividends might indicate lasting greater earnings for the company. How this argument has been contradicted that the dividend policy is irrelevant. It is for this reason that this paper will examine on the fact that company's dividend p olicy is irrelevant to its market value. ... i-Miller (M&M) theorem, (Irrelevancy Theory) (1961) forwarded by Franco Modigliani and Merton Miller, influences the base for modern view on capital structure, although it is usually perceived as merely scholarly because it presumes away numerous significant elements in the capital structure decision. The theorem argues that, in a perfect market, the value of a firm is irrelevant to how that firm is funded. This outcome offers a basis used to study real global reasons why capital structure is appropriate. These other reasons comprise agency costs, bankruptcy costs, information asymmetry, taxes among others. The theorem has been used to show that dividend is irrelevant to firm’s market share. Merton Miller and Franco Modigliani (MM) under their theory argued that in perfect financial markets (no transactions costs certainty, no taxes, or other market imperfections), the value of a company is impacted by the allotment of dividends. They claim that company’s value is mainl y driven the prospective income and risk of its investments, therefore, maintaining income or paying them to the shareholders in dividends does not affects its value (Grullon et al 2002). MM through its theory indicated that provided the company is attaining the returns anticipated by the market, it does not matter whether the returns is directed to the stockholder as individuals currently, or reinvested. They would perceive it in terms of dividend or price appreciation. Therefore, in this case the shareholder can develop their individual dividend through selling the stock when they need cash (Lie 2000). They qualified their argument through this calculation: V t = 1/1+rt[Dt+Vt+1-m t+1P t+1] Where rt = Discount rate Dt = Total Dividends Paid V t+1 = Firm Value @ t+1 = ntP t+1 M t+1P t+1 = Amount