Question

There are a few theories and explanation with regard to the impact of dividend policy on share prices. Which one is the most compelling (acceptable)for you? Why?

Answer 1

In my opinion Gordon's dividend policy theory is the most compelling one. It is also determined as one of relevant dividend policies in finance.

It is termed as 'Bird in the hand' theory and states that present dividends available are useful for determining the value of the company or firm. Its main constituents are future dividends, cost of capital and annual growth expected in future of the company. It determines dividend valuation at different stages of a company by means of price share changes.

Although the theory has its own limitations, however it is useful and accepted by many in determining the market price of share by forecasting future dividends of a company. This is a very important information for shareholders in determining the cash outflows of the company as on the basis of which they would be able to know how much the company would be able to invest their money in the company so that they might be getting a good returns for the same.