Question

Please explain in Detail:

Discuss any 10 theories of dividend and their implications to the real world
- Put citations to back up the theories

Answer 1

Dividend theories and implication of theory in real world discussed Below:

1.Relevance theory-According to relevance theory dividend affects value of firm so the dividend distribution and value of firm directly related to each other.Prof. James E Walter explain  that the choice of dividend payout ratio almost always affects the value of the firm.So he explain importance of internal rate of return and cost of capital for calculating dividend distribution to shareholder.

2.Irrelevance Theory-this theory suggest that distribution of dividend does not affect the value of firm.According to this theory   dividend is basically a cash payment as a reward to shareholder for investing in particular company.

According to Modigliani and Miller in a perfect world with no taxes or bankruptcy cost, the dividend policy is irrelevant.

3.Residual theory-The residual theory of dividend policy explain that  residual earnings should only used by firm for payment of dividend so dividend should be paid only when fund is available after the optimum level of expenditure done by organisation.

4.The Bird in the Hand Theory-This theory explain that investor are interested to receive dividend in present not for future,stockholders want to minimise their risk and prefer current dividend compared to future dividends.

5.The Tax Differential Theory-This theory suggest that investor want more dividend because on dividend more tax charged compare to capital gain.This theory suggest that if dividend pay out ratio is less the value of firm is maximum.

6.Percent Payout Theory-According to this theory investor want dividend and managers want investment in company for wealth maximization so company should adopt 100 percent payout policy described by rubner.

7.Per Cent Retention Theory-This theory suggest that firm should follow 100 percent retention policy which help organisation to receive investment and its also beneficial for shareholders.

8.Agency Cost Theory-this theory suggest that dividend should pay considering agency cost.That means firms payout dividends in order to reduce agency costs.

9.Dividend valuation theory-This theory explain that the value of a company’s shares is sustained by the expectation of future dividends.

10.Gordon Growth theory-This theory suggest that if dividend is retained what will be growth opportunities for company.