Miller And Modigliani's Dividend Irrelevance Theory?

In this situation, the manager will try to increase profits as much as possible, meaning they may: • Select accounting methods that maximise profit instead of ones that better reflect the firm’s current position such as using a different depreciation method, accelerating revenue recognition or changing the level of depreciation. Try to manipulate accounting figures. Adopting a short-term focus instead of a long-term one. In this perspective, PAT is siding towards regulation. The Agency Costs of Equity One part of residual agency problems is the agency cost of equity. This is because managers’ shirking (they become less productive because they see no need to work for no extra pay) and conflicts with outside equity interests reduce the value of the firm. To minimise this, monitoring and bonding costs are required to implement measures to minimise its detrimental effect on the value of the firm. It must be noted that no firm will completely eliminate this as costs will increase exponentially as one tries to eradicate more and more. Thus, there is an optimal trade-off point between monitoring costs and agency costs. This is where the marginal monitoring and bonding cost equals the marginal shirk. The Agency Costs of Debt Much like the agency cost of equity, there is also one from debt. This is due to the fact that managers will always try to shift wealth from debt to equity holders. Managers have their stake in the firm’s equity and

George C. Philippatos and William W. Sihler, 'Models of Dividend Policy', Financial Management (Allyn and Bacon), 228-229

When a company decides to pay dividends, it has to be careful on how much it will be given to the shareholders. It is of no use to pay shareholders dividends

This situation can lead to negative consequences for a business when its executives or management direct the organization to act in the best interest of themselves instead of the best interest of its owners or shareholders. Stockholders of the enterprise can keep this problem from arises by attempting to align the interest of management with that of themselves. This normally occurs through incentive pay, stock compensation, or other similar incentive packages that now cause the managers financial success to be tied to that of the company (Garcia, Rodriguez-Sanchez, & Fdez-Valdivia, 2015; Cui, Zhao, & Tang, 2007; Bruhl, 2003; Carols & Nicholas,

A company has to find a way to achieve a balance between rewarding managers to the point that it is detrimental to the company and finding a way to maximize the wealth of the shareholders.

The fact that shareholders are taxed twice through this repayment methodology infers that dividends are not their repayment technique of choice. Furthermore, paying out cash reserves through dividends also has the effect of both reducing the company’s assets and also inhibited the company’s ability to fund future growth as Dividends reduce the company’s retained earnings.

managers may not directly set the cost of capital, they play a large role in determining the capital structure

Dividends are subjected to higher tax rate compare to capital gain increased due to share buy-back. This discourages shareholders from desire to receive high dividends in place of higher capital gain as share values increase. A comparison is made below between the proposed capital structure and dividend policy.

Since the emergence of the so-called irrelevance theorem by Miller and Modigliani (1961), many corporations are puzzled about why some firms pay dividends while others do not. They were the first to study the effect of dividend policy on the market value of firms by assuming that there are no market imperfections. Miller and Modigliani (1961) proposed that divided policy chosen by a firm has no significant relationship in as far as the market valuation of the firm is concerned. They went further to explain that; the shareholders wealth remains unchanged irrespective of how the firm distributes it income because the firms’ value is rather determined by their investment policies and the earning power of its assets. They further stated that the opportunity to earn abnormal returns in the market does not exist, that is, owners are entitled to the normal market returns adjusted for risk.

While conducting the analysis of EMI group’s dividend policy, one factor that stood out to us was the clientele effect. The clientele effect shows us who holds most of our outstanding shares. High tax-bracket individuals would prefer zero-to-low dividend payout to save on taxes. Low tax-bracket individuals would prefer a low-to-medium dividend payout, which gives them additional income while helping them save on taxes. An investing corporation would prefer a higher dividend payout because if they own a significant amount of shares, say 1 million, the income stream from that dividend would provide the company with more monetary resources while benefitting from tax exemptions. So before setting a dividend policy for EMI group, we must first

In practice, dividend policy will be affected by taxes as tax rates for different categories of investors will differ. Also, a firm’s dividend policy is perceived by the financial markets to be a signaling mechanism. A cut back in dividends may signify that the firm perceives tough

The dividend policy has grown over the years. This may be so that the company projects itself as a less risky share and thus also gaining investors faith. The investors buy its shares and thus increase its demand. This helps to gives positive signals to the investors signalling that the company is stable and can generate earnings steadily. This hypothesis is gains standing from the dividend hypothesis theory.

The first objection is related to the fact that this is a totally new approach concerning dividend policy, and nobody can predict what is going to happen. We consider that this may have positive effects on share prices, especially taking in consideration that it will stabilise the market price of the company.

Nevertheless if companies operate in weak markets and fail to create growth and profit the concept of maximization of shareholder wealth is also an opportunity for self-regulation and security against threats for a company. This approach is in particular useful for safeguarding against difficulties arising from wrong or misguided leadership within a corporation. Shareholders of a company have the strongest interest in a company’s success because they often invest a lot of capital in the business and require revenues for their deposit (Moore, 2002). As a matter of fact, they become more

In this paper, a study on the Dividends Discount Model (DDM) will be explored and explained. The four main topics that this essay will be based around include what two common share valuation techniques are used, the dividend discount model and the use of a multiples approach, a discussion on the relative advantages and disadvantages of dividend discount model and a look into which model would produce the most accurate results and Why? With the relevant content, research, and analysis of these specific topics, an understanding of these methods and procedures will be the overall objective and purpose of this paper.