Analysis of Dividend Policy Assignment 2022

Running head: ANALYSIS OF DIVIDEND POLICY
ANALYSIS OF DIVIDEND POLICY
Name of Student
Name of University
Author’s Note

ANALYSIS OF DIVIDEND POLICY1
INTRODUCTION:
The dividend irrelevance theory can be termed as the theory where the investors do not
consider the company’s dividend policy rather they sell the stocks or the portion of the portfolio
of equities. This enables them to have liquid cash. The dividend irrelevance theory also states
that the declaration of the company’s dividend theory does not affect the investors who are the
owner of the stock of that company. As per this theory the company the dividend does not add
any value to the company’s stock price.

ANALYSIS OF DIVIDEND POLICY2
DIFFERENT TYPES OF DIVIDEND:
The problems that are associated with the company’s dividend policies can make any
financial professional in the state of dilemma and uneasy. The dividend paying policy of any
company affects the company’s retained earnings, growth opportunities, company’s overall
values and even the shareholder’s wealth. As per Kent (2014), the dividend policies of the
company needs to be created in such a way that the company can generate revenue from the
market and also the profit maximization of the company can be increased by considerable means.
Kent (2014) also suggested that the dividend policy of the company is one of the most important
part of the corporate financial management for the company. The dividend policy of the
company should state that the amount of cash a company should reinvest in the business. The
reinvestment can be done to assist the business to expand or to buyback more share from the
market. The dividend policy of the company also decides the amount of cash the company to
provide to its shareholders in the next financial year or accounting year. The dividend payment
made by the company to its shareholders or the owners of their shares must be out of its
earnings. The dividend paid by the company is mostly in the form of cash. The payment of the
dividend made by the company to its shareholders gave rise to the different policies that might
affect the company’s financial position. The three most used dividend policy model that are used
by the companies are as follows:
Modigliani-Miller Hypothesis Model:
Modigliani Miller Model is the model that states about the irrelevance concept of the dividend
paid by the company to its shareholders. As per this model the market value of the company can be
calculated using the earning power of the company and also the risk that are associated with the
underlying asset of the company that is independent of the finances investment or any kind of distributes

ANALYSIS OF DIVIDEND POLICY3
investment (Yuan et al 2014). As per this method the firm can choose for three ways to finance. The
three finance includes borrowing, spending of the profits and insurance of shares. Modigliani and Miller
also stated that after assuming certain things the company will find no difference between the debt or
equity. Modigliani and Miller theorem firstly assumes that the market is the perfectly efficient. As per
this theorem it can be stated that the company operating in the perfectly efficient market do not pay any
kind of taxes, trading of the securities are also been exceeded, and other information are perfectly
symmetrical. As per this proposition the unlevered firm is equal to value of levered firm. Here,
unlevered firm can be explained as financing made through equity and value of levered firm can be
termed as financing through mix of debt and equity. When the company is doing business in perfectly
efficient market then the capital structure of the company does not impact its value. The only
disadvantage that can be drawn from the first proposition of Modigliani Miller is that the company need
to pay taxes in the perfectly efficient market, so the company do not have a chance to enjoy tax-
deductible interest payment.
As per the proposition made by Modigliani Miller theorem the cost of equity of the company is
directly proportional to the leverage level of the company. To compensate the risk that are associated
with the additional risk are higher than the cost of equity.
As per the analysis of the two propositions of Modigliani Miller Theorem, it can be determined
that the second propositions are real to the world and company can actually invest in debt and equity,
which will be similar to the leverage level of the company. In this proposition also the company needs to
consider the tax rate and debt of the company. This will also assists the company to generate revenue as
the tax deductible interest payments.