Fundamentals of Financial Management, Third Edition

SUMMARY

The usual practice in a company is to apportion a part of the profit for dividend payment and to retain the other part for investment in profitable channels. Determination of the ratio between dividend payment and retention of earnings is very important. There are different views in this respect. M-M hypothesis suggests that dividend payment or no dividend payment has the same impact on the value of a firm. The shareholders are therefore indifferent towards dividend. However, in imperfect market conditions, where taxes and transaction cost exist, shareholders prefer cash dividend. Residual theory prefers retention of earnings; however, smoothened residual theory suggests that retention should be preferred only after constant dividend ...