Question

#Question/ *Dividend policy relates to the management decision on how much of the company's earnings are to be paid out to shareholders as dividends vs retaining for reinvestment in new opportunities. in general, there are three schools of thought in regards to the relationship between dividend policy and stock value".

-Discuss the THREE (3) schools of thought highlighted in the above statement?

Answer 1

There are three school of thoughts which emphases relation between dividend policy and stock value. They are as follows:

1) Dividend Discount Model - This theory enumerates that stock price is equal to present value of all future payments of dividend. In this theory stock price is directly proportional dividends. Thus higher the dividends, the higher the stock prices.

2) Modigliani Miller Theorem - As per the theory the value of stock price is indifferent to dividend policy. The shareholders are indifferent to division of retained earnings into dividends and new investments. Thus the amount of retained earnings which is spent on dividends is balanced by issue of new stock

3) Clientele Effect - It states that in changing the dividend policy there is division in preference of shareholders in regard to some of them buying additional shares and some others sell their shares and go with other options.