Corporate Financial Management: Coursework Management
‘Dividend policy of a firm has no relevance to the value of the firm’. Miller & Modigliani 1961.
From the viewpoint of Modiglian and Miller (1961) the value of a firm is solely determined by its decisions of investment and that the dividend policy is simply a detail. The scholars observe that the impact of any specific dividend policy could be entirely offset by other means of financing including sale of new equity sales. This argument relies on a number of assumptions. For instance, investors do not care whether the kind of dividends they receive is from capital gains income or dividend income. There is also the assumption of no issuance costs. In respect to these, if organizations do not have to pay the cost of issuance when they are issued with new securities, they may be able to obtain the required equity capital on the similar cost. This is irrespective of whether they paid their past earnings as dividends or retained them. In some circumstances, dividend payments may result into regular pay of new stock. Another factor is the existence of policy of investment. In the perspective of Miller and Modglian, an organization’s investment policy is not impacted by its dividend policy. What is more, it is not a dividend policy that actually determines the value of a firm, rather it is a dividend policy.
From Modiglian and Millers viewpoint the existence of investors who favor a dividend policy of a given firm have no substantial impact on the share value. They identify that an organization which alters its dividend policy could end up losing a number of stakeholders to other entities which presents dividend policies that are more appealing. Consequently, this may lead to a temporary reduction in relation to the price of an organization’s stock. Consequently, investors with preference of a new dividend policy