Finance: Evaluating Investment Decisions and Dividend Policy

This finance report provides a detailed analysis of project evaluation and dividend policy. Part A focuses on the investment decision for Damavand Manufacture's new product, Lollypop, utilizing NPV, IRR, payback period, and profitability index to demonstrate its financial viability. Part B exami...Read More

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Table of Contents
Part A: (Project evaluation) Investment Decision......................................................................2
Part B: (Dividend policy and capital structure) financing decisions..........................................3
References:.................................................................................................................................4

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Part A: (Project evaluation) Investment Decision
The information provided in the above calculation directly indicates that the new
product of Damavand Manufacture will yield higher returns from investment. The product
Lollypop will generate adequate returns in the long run, as the investment supports all the
relevant investment appraisal techniques, which is calculated in the above figure. The NPV of
the project is mainly at the levels of 1,946,877, which is positive and indicates that present
value of future cash flows are higher than the current investments that is conducted in
developing a new product (Baum & Crosby, 2014). The further confirmation is provided by
the internal rate of returns, whose value is at the levels of 17.67%, which is higher than the
discounted value of 9%. In addition, the payback period has been calculated to be at the
levels of 3.5 years, which is lower than the project life. The last confirmation about the
financial viability of the project is provided by the profitability index, which is higher than
one and is at the levels of 1.29. Thus, creating a new product named Lollypop will eventually
allow Damavand Manufacture to increase its revenue and income in the long run.

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Part B: (Dividend policy and capital structure) financing decisions
The dividend irrelevance and capital structure theory provided by Modigliani and
Miller directly indicated that dividend policy of capital structure does not have any impact on
the share price valuation of an organization. Moreover, Modigliani and Miller are subject to a
perfect world scenario, where there is no taxes and bankruptcy. Thus, constraint of the perfect
world negatively affects the viability of the theory depicted by Modigliani and Miller, as in
real world scenario, both dividend policy of capital structure has direct impact on the share
price valuation of an organization. Brusov et al., (2018) criticizes that dividend discount
model is one of the most reliable calculation that uses dividends to determine the current
share price valuation of an organization. Thus, it can be understood that under real world
scenario the theory of Modigliani and Miller does no hold ground.
There are specific proposition ah was made by Modigliani and Miller while
presenting their theory. The propositions are depicted as follows.
 First proposition- Irrelevance of the capital structure
 Second proposition- Rate of Return on Equity
 Third proposition- Irreverence of Dividend policy
The evaluation of MM theory directly indicates that there are other factors such as
corporate tax rate, return on equity and capital structure of an organization that has no impact
on their share price valuation. However, the recent studies and scenarios has mainly depicted
that the factors that were considered by MM theory as irrelevant have direct impact on the
valuation of the organization. Thus, organization’s current dividends and capital structure has
direct impact on the overall share price value, as investors view the return and risk rewards of
an investment (Brusov, Filatova & Orekhova, 2014). Hence, the MM theory is not viable
under the current capital market and valuations that is conducted by investors.

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References:
Baum, A. E., & Crosby, N. (2014). Property investment appraisal. John Wiley & Sons.
Brusov, P., Filatova, T., & Orekhova, N. (2014). Mechanism of formation of the company
optimal capital structure, different from suggested by trade off theory. Cogent
Economics & Finance, 2(1), 946150.
Brusov, P., Filatova, T., Orekhova, N., & Eskindarov, M. (2018). Inflation in Brusov–
Filatova–Orekhova Theory and in Its Perpetuity Limit Modigliani–Miller Theory.
In Modern Corporate Finance, Investments, Taxation and Ratings (pp. 161-179).
Springer, Cham.