Question

Explain the Implications of 10 dividend theories.

Answer 1

1. Dividend Irrelevance Theory: This theory implies that any dividend distribution will not impact the value of share of a company. Modigliani and Miller supported this theory that there will not be any impact of share because of dividend distribution policy

2. Dividend Irrelevance Theory: This theory implies that any dividend distribution policy of a company will impact the value of a share of a company. Prof. James E Walter supported this theory implications.

3. Bird in Hand Theory: This theory says that investors would like to receive dividends at present than in future because bird in hand is always guaranteed.

4. Residual Dividend Policy: This theory states that all the residual earnings of the company shall be distributed as a dividend after meeting its expenses.

5. Per cent Retention Theory: This theory suggests that the company shall retain all of its earnings to use it for making further investments.

6. Per cent Payout Theory: This theory suggests that the company shall pay out all of its earnings to investors to increase the earning of shareholders in current terms.

7. Tax Differential Theory: This theory explains that the value of the firm is maximised with a lesser dividend payout ratio because in general tax on dividends is more than the tax on capital gains. Depending on the tax structure of the company, dividend policy shall be modified to maximise the value of the company.

8. Gordon's Dividend Growth Theory: This model suggests that if the company is able to generate more returns with retaining than the cost of equity, then earnings shall be retained instead of distributing as a dividend because it helps in the growth of the company share value.

9. Dividend Valuation Theory: The expected future dividends of the company is the present value of the company according to this theory

10. Agency cost theory: Dividend payout policy of the company shall be in such a way that it reduces the overall agency costs of the company.

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