USA: +1-585-535-1023

UK: +44-208-133-5697

AUS: +61-280-07-5697

Conflicting Theories

There are conflicting theories regarding the impact of dividend decision on the valuation of a firm.

 

1. Irrelevance Concept of Dividend, 2. Relevance Concept of Dividend.

 

1. Irrelevance Concept of Dividend

 

This concept was developed by Solomari, Modigliani and Miller. According to their approach dividend policy of a firm is irrelevant as it does not affect the wealth of the shareholders. In their opinion, investors do not differentiate dividend and capital gains.

There is no impact on the dividend policy or the share price of the company and further

consequence.

 

2. Relevance Concept of Dividend

 

Myron Gordon, John Linter, James Walter, Richardson and others are associated with the ¬†relevance concept of dividend. According to their approach dividend policy has a positive impact on the firm’s position in the stock market. In other words there is a positive relationship between the Dividend Policy and price level of the company’s shares in the stock market. Higher dividend rate increases the value of stock while low dividend decreases their value in the stock market.

 

WALTER’S APPROACH

 

He pointed out that dividend policy always affects the goodwill of the company. ¬†according to his approach, It is a relationship between the firm’s return on investment or internal rate of return and cost of capital or required rate of return.