Lawal plc are currently 5878920 shareholders with varying dividend demands. the shareholders in the company have...

Lawal plc are currently 5878920 shareholders with varying dividend demands. the shareholders in the company have no objection to the boards decision to invest 500 million in a cement manufacturing project. Comment on this statement with the aid of a graph as regards fishers separation thereom stating any assumption. how will your comment be affected if the capital market is imperfect?

Expert Solution

The fishers separation theorem states that :

1. The firm's or board's decision is independent & separated from its owner's preferences (owners) i.e. its investment decision and dividend decision.

2. The firm's or board's investment decision is separate from its financing decision.

Assumptions :

1. Capital market are perfect and all the information is easily available.

2. No transaction cost and no exchange cost.

3. No taxes

4. Two period model.

Based on above statements Lawal plc should take their decisions independently regardless what their sharehplder's dividend demands. Both the decision related to the dividend and investment should be separated and wisely taken.

Fishers separation theorem graph is given below.

If the capital market is imperfect, then the Lawal plc should distribute the dividend instead of investing the 500 million in cement manufacturing project because in imperfect capital market the information in the market is not available in full and there is no guarantee that the information available is correct.

jeff jeffy answered 1 year ago

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