LEARNING OBJECTIVES

• Highlight the issues of dividend policy

• Critically evaluate why some experts feel that dividend policy
matters
• Discuss the bird-in-the-hand argument for paying current
dividends
• Explain the logic of the dividend irrelevance
• Identify the market imperfections that make dividend policy
relevant
• Understand information content of dividend policy

1
 INTRODUCTION
• Dividend policy involves the balancing of the
shareholders’ desire for current dividends and the
firm’s needs for funds for growth.

2
 Issues in Dividend Policy
• Earnings to be Distributed – High Vs. Low Payout.
• Objective – Maximize Shareholders Return.
• Effects – Taxes, Investment and Financing Decision.

3
 Relevance Vs. Irrelevance
• Walter's Model
• Gordon's Model
• Modigliani and Miller Hypothesis
• The Bird in the Hand Argument
• Informational Content
• Market Imperfections

4
 DIVIDEND RELEVANCE: WALTER’S
MODEL
Walter’s model is based on the following assumptions:
• Internal financing
• Constant return and cost of capital
• 100 per cent payout or retention
• Constant EPS and DIV
• Infinite time

5
 Walter’s formula to determine the market
price per share: