Question

B. (10%) Explain whether the dividend policy of a company affects its value, by describing the various theories that have been put forward in the literature. Provide for each theory at least two references from published papers in scientific journals (approximately 1,000 words).

Answer 1

Dividends Policies which can directly affect the investors' interest in investing in the company.

Here we can see four types of dividend policies and their impact over the interest of investors towards company.

1). Regular Dividends:-

In this method, the company gives dividends irrespective of profit or loss, if the company earn more profit on one particular year, it retained excess profit over the dividends. In the same way, it pays dividends whether it incurred the loss.

The investor who is not ready to take the risk and satisfied with fixed earning towards year whether they can get the low return from the investment. The stable outflow of dividends of this company helps them to earn goodwill from investors of the market.

Usually, highly stabled companies whose share value is higher generally have this kind of shares.

2). Fixed-rate dividend

Irrespective of Volum of profit & Loss company give a fixed percentage of income as dividends over the year, if the company earns $10,00,000/- or $10,000/-, it gives the same percentage of earnings as dividends, whether it can be 10% or 50%.

By this method, the company can avoid risk by restricting dividends outflow in respective of profit earned by the company.

This policy helped the company to retain the market value of the share in a stable. usually, companies follow this method to retain some profit as retained earnings. that help the company to increase the liquidity of the company which has impacted the value of the company in a positive way.

In this method investor who wants fixed rate of dividends & very much particular about the market value of share rather then dividends, from the share are opted to invest in.

3). Irregular Dividends.

In this method, there are no criteria. all decisions and payout of the dividends vested with board of directors of the company.

This kind of policies usually adopted by the company that has no obligation to pay dividends to the investors.

This method usually opted to increase the liquidity of the company. if company has more retained earning it can invest in various ways to grow purpose.

these dividend policies attract no investors by paying dividends but increase the value of the company by making more retained earning which lead to higher growth.

4). Zero Dividend Policies.

In this method, the company won't pay dividends to the shareholder whether it has a loss is a huge profit.

irrespective of paying dividends to attract the investors, it shows result of the growth of the company by increasing its market value of share with a huge amount of retained earnings.

The very limited well-grown company used to opt for this method of dividends. the company gets funds from low-cost funds and it reinvests it's earning into the company which has zero cost.

This leads to higher growth in the market value of the company.

The investors who is doing nothing with dividends but highly interested in market value of the share can invest in this kind of the company