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Essay on Dividend Theories : Honda Motor Co. Ltd

   

Added on  2020-06-04

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Essay

Table of ContentsINTRODUCTION ..........................................................................................................................1Dividend theories.............................................................................................................................1Dividend and a Hero Honda lifecycle..............................................................................................3Importance of capital structure........................................................................................................6Conclusion.......................................................................................................................................7REFERENCES................................................................................................................................9

INTRODUCTION A dividend is the distribution of a portion of a company earning which is decided by theboard of director, that is to be paid to its shareholder. Dividends can be states as issued as thecash payment, as shares of stock, or other property. A company pays dividend to its shareholderon the monthly or quarterly basis and it can be chosen by the Board of director on various timesframes and payout rates (Kieschnick, Laplante and Moussawi, 2013). At the time when firm paydividends it returns the profits to its stakeholder through cash distribution Manager claimed tominimise the dividends when the firm had no other choice while it increases dividends whenthey are confident that future cash flow can help in increasing the profit. The present study isbased on “Honda Motor Co. Ltd. Which develop manufacturer and market different types ofproducts such as the motorcycle, financial services etc. to its customers. The organization makesrange of motorcycle and financial services to its customer with respect to earn the profit. Thepresent study will cover different types of dividend theories which can be used by the firm inrespect to distributing its dividend to its shareholder.Dividend theoriesThere are different types of dividend theories such as dividend signaling theory anddividend smoothing theory which can be used by the company in order to pay dividends to itscustomers (Gul and et.al., 2012). Different types of theories are known as relevance theories adirrelevance theories. In irrelevance theories, it includes Modigliani and Miler model and inrelevance theories, it includes Walter model and Gordon's model. The relevance theories showthat there is the link between the payment and value of the firm. Further, it shows the positiverelationship between the value of the firm and share of the company. On the other side accordingto the irrelevance theories of dividend, there is no relation between the value of the firm anddividend payments to shareholders (Khaveh and et.al., 2012). The interest of shareholder ishigher in return and investor do not think about the way higher return can be earned by the firm. Dividend signaling is a theory which suggested that at the time firm announces toenhance in dividend payout then its shows the positive future prospects. However, the dividendpolicy theory is directly linked with the game theory. It is because managers with goodinvestment potential are more likely to signal (Mujahid and Akhtar, 2014). Moreover, this theoryis still a key concept used by individual if ineffective markets. On the other side, dividendsmoothing is another theory of dividend and it remains puzzled for the financial economist. The1

smoothing dividend provides an equilibrium outcome. Further dividend smoothing can be statesas providing the dividend per share continuant more than two or more sequential years. There aresignificant differences in the signaling theory and dividend smoothing theory. It criticallyanalyses the manager in the firm tries to follow practices which smooth their dividend patternsover time with respect to accomplish the dividends' stability (Xu and et.al., 2016). The reason forwhich manager choose smooth dividends payouts as it based on the twin concepts of theasymmetric and signaling aspect of dividend announcements. A signaling theory shows that if there modification is made in the dividend policy lead tocovey information related to the changes in the future cash flow (Rani, Yadav and Jain, 2012). Adecision made by the management of paying or not to pay dividends to lead to creating unwantedexpectations related to the future earning the potential of the firm which is stated as asymmetricinformation setting. Dividend signaling suggests the affirmative relationship among informationasymmetric and dividend policy. In another word, it can be stated that if there is higherasymmetric information level then it will have high the sensibility of the dividend for the futureprospect of the firm (Abdoli, Shurvarzi and Farokhad, 2012). The company stock price can beimpacted at the time when there is asymmetric information at work and due to the lack ofinformation related to the changes. Further, from the literature, it is suggested that corporate riskmanagement eases data asymmetry issue and it decidedly the value of the firm. It is argued thatrisk management improve the asymmetric data issues that cane stated as main important crucialof the profits sharing policy. There are different research which analyze dividend policydeterminants and includes different measures of information asymmetry (Keynes, 2016).Extending the signaling framework of Bhattacharya (1979) it provides hypothetical assist to theconsequence of company risk management on dividend payout policy.The Zakaria, Muhammad and Zulkifli (2012) demonstrates that as per the firms'operation policy the dividend policy cannot affect the market value of the Hero Honda companyas it helps in measuring firm cash flow which return through operating business activities.However, the signaling theory concern that the use of dividends for acting as a signal to transfermessage for the external market. Here the hypothesis is that manager know what is the true valueof the Hero Honda company as compared to outside investor. Apart from this one of the essentialassumption of the Bhattacharya model is that if the payoff is insufficient for covering thedividends then company need to cover from outside and pay the cost. It is criticised that why it is2

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