Walter and Gordon
INTRODUCTION :
The term dividend refers to that part of profits of a company which is distributed by the company among its shareholders. It is the reward of the shareholders for investments made by them in the shares of the company. The investors are interested in earning the maximum return on their investments and to maximize their wealth. A company, on the other hand, needs to provide funds to finance its long-term growth. If a company pays out as dividend most of what it earns, then for business requirements and further expansion it will have to depend upon outside resources such as issue of debt or new shares. Dividend policy of a firm, thus affects both the long-term financing and the wealth of shareholders. As a result, the firm’s decision to pay dividends must be reached in such a manner so as to equitably apportion the distributed profits and retained earnings. Since dividend is a right of shareholders to participate in the profits and surplus of the company for their investment in the share capital of the company, they should receive fair amount of the profits. The company should, therefore, distribute a reasonable amount as dividends (which should include a normal rate of interest plus a return for the risks assumed) to its members and retain the rest for its growth and survival.
DIVIDEND DECISION AND VALUATION OF FIRM :
The value of the firm can be maximized if the shareholders wealth is maximized. There are conflicting views regarding the impact of dividend decision on the valuation of the firm.
According to one school of thought dividend decision does not affect the share-holders’ wealth and hence the valuation of the firm. On the other hand, according to the other school of thought, dividend decision materially affects the shareholders’ wealth and also the valuation of the firm. We have discussed below the views of the two schools of thought under two groups: a.The Relevance Concept of Dividend or the Theory of Relevance.
The term dividend refers to that part of profits of a company which is distributed by the company among its shareholders. It is the reward of the shareholders for investments made by them in the shares of the company. The investors are interested in earning the maximum return on their investments and to maximize their wealth. A company, on the other hand, needs to provide funds to finance its long-term growth. If a company pays out as dividend most of what it earns, then for business requirements and further expansion it will have to depend upon outside resources such as issue of debt or new shares. Dividend policy of a firm, thus affects both the long-term financing and the wealth of shareholders. As a result, the firm’s decision to pay dividends must be reached in such a manner so as to equitably apportion the distributed profits and retained earnings. Since dividend is a right of shareholders to participate in the profits and surplus of the company for their investment in the share capital of the company, they should receive fair amount of the profits. The company should, therefore, distribute a reasonable amount as dividends (which should include a normal rate of interest plus a return for the risks assumed) to its members and retain the rest for its growth and survival.
DIVIDEND DECISION AND VALUATION OF FIRM :
The value of the firm can be maximized if the shareholders wealth is maximized. There are conflicting views regarding the impact of dividend decision on the valuation of the firm.
According to one school of thought dividend decision does not affect the share-holders’ wealth and hence the valuation of the firm. On the other hand, according to the other school of thought, dividend decision materially affects the shareholders’ wealth and also the valuation of the firm. We have discussed below the views of the two schools of thought under two groups: a.The Relevance Concept of Dividend or the Theory of Relevance.