Page 227 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes Value of the firm nP = 25,00,000
o
Thus the value of the firm in both the cases remains the same.

Critical Analysis of the Assumptions

1. Tax effect: The assumption cannot be true since the tax rate for the dividend and capital
gains are different.

2. Floatation costs: The proceeds that the firm gets from the issue of securities are net off the
issue expenses - the total issue expenses include underwriting expenses, brokerage and
other marketing costs, to the tune of 10 - 15% of the total issues in India. These high costs
cannot be ignored.
3. Transaction costs: It is an unrealistic assumption that investors do not have to incur
transaction costs like brokerage when disposing off the shares. Further, the inconvenience
and the uncertainty involved in the share price movements make the investors prefer
current income by way of dividend to plough back of profits by the company.
4. Market conditions: Sometimes, market conditions do effect the investment decisions of
the firm. For instance, though a firm has profitable investment opportunities, the bad
market condition may not allow it to mobilize the funds. In such cases, firm will have to
depend on the retained earnings and will have a low dividend payout ratio.



Caselet ‘More generous’ Dividend this Year – India will
Continue to be Most Competitive: Premji

he Wipro Chairman, Mr Azim Premji, has indicated a "more generous" dividend
payout than in the past two years from its existing cash kitty of close to $1 billion.
TThe company was on the lookout for mid-sized acquisitions in the US, Europe and
India, he said at a press conference in New Delhi on Sunday.
"We have $1 billion in cash reserves which will be utilised for the payment of dividend
and the acquisitions. The dividend payout ratio will be more generous than in the past
two years, but in line with what we have indicated under the broad outline of the company's
current dividend policy," Mr Premji, who owns 81 per cent of the company, said.
Mr Premji said Wipro was looking at mid-sized acquisitions in America and Europe, and
also in the domestic market. "It will enhance our consultancy skills. We are not looking for
general-purpose acquisitions, but at specialised verticals. We are looking for companies
which can give us a good geography such as continental Europe," he said.
Expansion plans: In a bid to leverage on other low-cost locations, Wipro plans to set up an
integrated IT and BPO facility in Bucharest (Romania) in the next 8-12 weeks.
"The centre would serve the markets of Germany and France. We are also looking at one
more centre in Far East which will be more cost-efficient than China," he said. Wipro
currently has centres in Shanghai and Beijing, he added.

The share of business from other low-cost countries would increase, he said but pointed
out that India was still the most cost-effective destination.

Contd...

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