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A study on financial_research

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PGP-FM II-97-03 #1-Dividend Policy • The Larger the RETENTION, the LESSER the dividends • The choice between retention and payout would depend on the kind of effect each of these choices would have on the objective of maximizing the wealth of the shareholder • Payout, if such a decision would lead to maximizing the Wealth of the shareholders: RETAIN otherwise #2 • Irrelevance theory of Dividends • The theory rests on the BASIC premise that; DIVIDEND DECISION IS A RESIDUAL DECISION • The Dividend decision flows from out of the PRIMARY decision to RAISE CAPITAL or raise finances in a particular fashion than in another; funding is the primary decision and dividend decision that reflects SERVICING COSTS is only a PASSIVE RESIDUAL #3 • If dividend policy is not a passive residual and instead is an “active Financing decision”, the decision to “retain or, payout” would rests on the premise— • --Retain if the firm requires funds for Investment and CANNOT procure them AT A RATE CHEAPER THAN ITS EXISTING COST OF CAPITAL. It is of course assumed that the returns on the New Investment will be greater than the marginal cost of capital #4 • Conversely, if Investment Opportunities are few and if the “returns on the New investments are LESS than the Cost of Capital, PAY OUT” • Thus the GROUND RULE for the “adequacy of acceptable Investment opportunities” is the comparison of the ROI (r) with the Cost of Capital (Ke) #5 • Theoretically, the fo ...
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