Financing Decisions- Dividend Policy & Capital Structure

Running Head: BUSINESS FINANCE
BUSINESS FINANCE
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1BUSINESS FINANCE
Table of Contents
Financing Decisions- Dividend Policy and Capital Structure....................................................2
Dividend Irrelevance..............................................................................................................2
Capital Structure Theories......................................................................................................3
Reference....................................................................................................................................5

2BUSINESS FINANCE
Financing Decisions- Dividend Policy & Capital Structure
The decisions of financing are the crucial one of the most crucial decisions that are
taken by financial manager in relation to the financing mix of organisation. The decisions are
related to the borrowing as well as allocations of the funds that are required for the decisions
of investment. The important decisions made by the business organisation includes
investment decisiosn, financing decisions and dividend decisions (Baker and Weigand 2015).
Capital Structure is defined as the way in which the buisness organisation finances their
assets with the help of combination of the debt, equity as well as hybrid securities. Capital
structure of the firm is the composition of the their overall liabilities. Moreover, dividend
policy is defined as determinition of the earnings division between the retained earning and
payments to the sharesholders (Hunjra et al. 2014).
Dividend Irrelevance
Dividend theory of irrelevance is the theory that considers the dividend decisions for
being irrelevant, it is because it does not help in affecting the value of the firm. This theory
holds the fact that the investors does not concers theirselve with the dividend policy of the
company because they are having the opportunity for selling their portion of the equity in cse
if they woulld like to have cash. The theory indicates that the declaration as well as the
payment of the dividend have the no or little impacts on the prices of the stock, which does
not add the value to the stock price of the company (Priya and Mohanasundari 2016). The
value of the firm depends upon the earnings of the firm and earning of the firm depends upon
the investment policy of the firm, but not on the dividend policy. Moreover, the firm that
pays higher dividends generally offers less appreciation of price but it must provides the same
return to the sharesholders given the risks characteristics of risk as well as cash flows from
the decisions of investments. Therefore, there are no taxes, and if the capital gains as well as
the dividends are taxed at same rate, the investors would be indifferent for receiving the