As a student of management and finance, it is essential to understand dividend policy and how it affects the value of the firm. With relevant theory homework help, you can understand how divined policy is relevant and what justifies such an opinion.
Understanding relevant theory
There exists conflicting opinions whether the dividend policy affects the valuation of the firm or not. According to some, dividend policy is relevant to the valuation of the firm, however, others disagree. When the choice of the dividend policy affects the valuation of the firm, then it is considered relevant. This forms the very base of relevant theory which you can understand with relevant theory assignment help.
When the dividend policy is relevant, the dividend payout ratio will experience a change in the market value of the firm. However, the payout ratio will be optimum.
What are the models which justify the relevance of dividend policy?
There exist two models that justify the relevance of how the dividend policy affects the value of the firm. Relevant theory homework help will help you to understand that. These are:
- Walter’s model
- Gordon’s model
Professor J.E Walter opines that the choice of dividend payout ratio affects the value of the firm. He studied the relationship between internal rate of return and cost of capital to determine the optimum dividend policy which maximized the amount the shareholders received. It is based upon the assumptions below:
- The firm has infinite life.
- Retained earnings are the only source of financing for the firm.
- Internal rate of return and cost of capital is constant.
- Earnings are distributed as dividends or reinvested.
- Dividends and earnings remain constant.
Gordon’s model which justifies that dividend policy affects the value of the firm is based upon certain assumptions, which you can learn through relevant theory assignment help. They are:
- The firm deals in no debt.
- There are no external sources of financing and are financed by retained earnings.
- The internal rate of return and the cost of capital remain constant, irrespective to any change.
- Corporate tax is non-existent.
- The retention ratio is constant and as a result so is the growth ratio.
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