Page 201 - DMGT409Basic Financial Management

Basic Financial Management Rupesh Roshan Singh, Lovely Professional University

Notes Unit 13: Theory and Forms of Dividend

CONTENTS

Objectives
Introduction
13.1 Theories of Dividend
13.1.1 Walter’s Model (Relevant)
13.1.2 Gordon’s Model

13.1.3 Modigliani-Miller Model (Irrelevance Theory)
13.2 Forms of Dividend
13.3 Summary
13.4 Keywords

13.5 Self Assessment
13.6 Review Questions
13.7 Further Readings

Objectives

After studying this unit, you will be able to:

Discuss theories of dividend
Explain forms of dividend

Introduction

If the choice of the dividend policy affects the value of a firm, it is considered as relevant. In that

case a change in the dividend payout ratio will be followed by a change in the market value of
the firm. If the dividend is relevant there must be an optimum payout ratio. If the dividend is

irrelevant, there must be an optimum payout ratio.
?
Did u know? What is optimum payout ratio?
Optimum payout ratio is that which gives highest market value per share.

13.1 Theories of Dividend

13.1.1 Walter’s Model (Relevant)

Prof. James E Walter argues that the choice of dividend payout ratio almost always affects the

value of the firm Prof. Walter has very scholarly studied the significance of the relationship
between internal rate of return (R) and cost of capital (K) in determining optimum dividend
policy which maximizes the wealth of shareholders.

194 LOVELY PROFESSIONAL UNIVERSITY