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CHAPTER 17
LEARNING OBJECTIVES
2
INTRODUCTION
3
Issues in Dividend Policy
4
Relevance Vs. Irrelevance
•Walter's Model
•Gordon's Model
•Modigliani and Miller Hypothesis
•The Bird in the Hand Argument
•Informational Content
•Market Imperfections
5
DIVIDEND RELEVANCE: WALTER’S MODEL
7
Optimum Payout Ratio
8
Example: Dividend Policy: Application of
Walter’s Model
9
Criticism of Walter’s Model
10
DIVIDEND RELEVANCE: GORDON’S MODEL
Gordon’s model is based on the
following assumptions:
•All-equity firm
•No external financing
•Constant return
•Constant cost of capital
•Perpetual earnings
•No taxes
•Constant retention
11
•Cost of capital greater than growth rate
Valuation
13
It is revealed that under Gordon’s model:
14
DIVIDEND AND UNCERTAINTY:
THE BIRD-IN-THE-HAND ARGUMENT