Fundamentals of Financial Management, Third Edition

POINTS TO REMEMBER

1. What are the different groups of dividend theories?
   • Dividend or retained earnings have the same impact. Thus dividend is not relevant. Modigliani-Miller approach falls under this group.
   • Retention of earnings is important. So dividend is not relevant. Residual Theory of Dividend falls under this group.
   • Dividend is relevant because it raises the value of the firm. Smoothened Residual Theory, Walter’s Theory, Gordon’s Theory, etc. come under this group.
2. What is M-M approach?
   • In perfect conditions, dividend payment or no-dividend have the same influence on the value of shares. But if the market is imperfect, meaning that there are taxes, transaction cost, irrationality and uncertainty, dividend or no-dividend have varying ...