Dividend Decision and Valuation of the Firm

Dividend Policy is the regulations and guidelines that a company uses to decide to make dividend payments to shareholders. There are three main factors that can influence a company’s dividend decision are: Free-cash flow, Dividend clienteles and Information Signaling. 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 valuation of the firm. We have discussed Dividend Decision and Valuation of the Firm into two groups:

  • The Relevance Concept of Dividend a Theory of Relevance
    • Walter’s Approach
    • Gordon’s Approach
  • The Irrelevance Concept of Dividend or Theory of Irrelevance
    • Residual Approach
    • Modigliani & Miller Approach

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  • Absolute Value Model   
  • Agency costs       
  • Bonus shares limitations and paying dividends         
  • Capital structure factors
  • Cash flow utility and arbitrage process           
  • Dividends-forms and merits     
  • Financial investment      
  • Irrelevance of dividend policy  
  • Miller’s model (present value of interest tax shield)
  • Modigliani and Miller Approach           
  • Option Pricing Model     
  • Real-World Factors Affecting Dividend Payouts        
  • Relative Value Model     
  • Relevance and elements of capital structure  
  • Residuals theory of Dividends 
  • Stock Dividends And Stock Splits         
  • Stock Repurchase          
  • The trade off theory (financial distress)