Essay about Business Finance DDM model

Dividends paid by the corporation. Dividend distributions reduce the equity of the corporation and the share value declines accordingly.

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

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

What’ s more, although investors like the dividend, it is just period solution to attack people and it may not be able to keep the company growing in a long run.

If the cash is kept in the firm, there are chances that these capitals will be reinvested and bring the Linear Technology potential benefit from tax shield and interest earnings. Thus, a part of the opportunity costs of paying dividend will be a deduction of tax by the nature of debt

c. How should FPL choose between dividends and share repurchases as alternative modes of payment?

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.

Some of the results that empirical studies of the dividend theories have produced are that all factors other than distribution level should be held constant, that is the sample companies should differ only in their distribution levels. Second each firms cost of equity should be measured with a high degree of accuracy. Unfortunately we cannot find a set of publicly owned firms that differ only in their distribution levels nor can they obtain their cost of equity. That’s why nobody has been able to identify a relationship between the distribution level and the cost of equity or firm value. Although none of the empirical test are perfect, recent evidence shows that firms with higher dividend payouts also have a higher required returns. This tends to support the tax effect hypothesis, even though the size of the required return is too high to be explained by taxes. All of this can affect what you tell a manager because they make the decision to expropriate shareholders wealth and

Based on the financing needs, as above dividends would be additional stretch on company finances

In general the three-stage approach allows us to add complexity to the standard dividend discount models by enabling changing growth scenarios throughout the forecasting period: an initial period of higher than normal growth, a transition/consolidation period of declining growth and final a period of stable growth. The main assumptions are that the company on which we conduct the calculation study currently is in extraordinary strong growth phase. The time period with the extraordinary strong growth must be strictly defined and eventually be replaced with the declining growth assumption. Lastly, Capital Expenditures and Depreciation are expected to grow at the same rate as revenues. .

Three main issues arise when it comes to dividend policy in firms. The first issue is whether

has to allocate more income for retained earnings. The more you retained, the lesser dividend available for the stockholders

71 of 2008, a company is no longer required to pay dividends out of the profits of the company. Dividends can be paid out of fair value adjustments and asset revaluations but a firm should consider the impact that non-cash flow gains will have on the ability of the company to pay a cash dividend (Financial Management, 7th edition, C. Correia). It may be argued that a company may elect to pay dividends from profits but the capital should not be reduced in any way as this is seen as being illegal. It may be imposed that a legal constraint be put in place to restrict the amount of dividend to be paid out relative to the company’s earnings in their respective financial period. Liquidity position of the company is an important consideration in dividend decisions. Liquidity may be under constraints due to economic conditions which is why it may be a variable of concern when firm’s dividend policy is being

Sourav has illustrated in the initial portion of his discussion how it is that the HPR and DDM values of his selected firms will differ, mainly as a result of the different assumptions underlying each formula. Between the HPR model’s generalized distribution assumption, and the DDM’s time-consuming need to forecast each incremental dividend to be paid, investors are faced with a dilemma when determining which model to use when valuing a firm. Valkama et al (2013) then add further complication to the matter when they raise the issue of how special dividends and stock splits can then further impact the raw inputs of these formulae, as they will therefore require special adjustments to properly accommodate the relevance of these situations. With this information in mind, I intend on further developing the relevance of the DDM from the perspective of an investor that is looking to benefit from an acquisition.

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.