This document discusses dividend policy and the theories around it. It outlines two main theories - the dividend irrelevance theory proposed by Miller and Modigliani, which states that dividend payouts minimally affect stock prices under certain assumptions. The second is the relevance theory, which includes Walter's and Gordon's approaches stating that dividend payouts do impact stock prices and a firm's cost of capital. It also describes Modigliani and Miller's approach and assumptions of perfect markets.

1. Dividend policy
Roll no.3

2. What is dividend policy
 A dividend policy is the policy a company
uses to structure its dividend payout to
shareholders. ... This is the dividend
irrelevance theory, which infers that dividend
payouts minimally affect a stock's price.

3. Dividend policy
 Firm has 2 choices
 • Pay dividend
 • Reinvest funds instead of paying out

4. Theories of dividend policy
 THEORY OF IRRELEVANCE
 1. Residual approach
 2. Miller and Modigliani approach
 THEORY OF RELEVANCE
 1. Walter’s approach
 2. Gordon approach

5. Dividend irrelevance theory
 The dividend irrelevance theory states that
investors may affect cash flows regardless of
a company's dividend policy. ... For example,
if the stock price before the dividend was
$15.65 and the company paid out a dividend
per share of $1.20, the stock price would drop
to $14.45.

6. Modigliani and miller approach
 MM Model is related to the formation of a
convenient capital structure for the company
which will yield the firm maximum returns and
lower the cost of capital to the firm. This
model was given by Modigliani and Miller.
This theory forms the basis for the modern
theories of capital structure.

7.  According to M-M, under a perfect market
situation, the dividend policy of a firm is
irrelevant, as it does not affect the value of the
firm

9. assumptions
A. There is perfect capital market
B. investor are rational
C. Information about company is freely
available
D. there is no transaction cost
E. No investor is large enough to effect
F. there are no taxes

10. relevant theory
 According to relevant theory payment of
dividend
 affect the firm's stock and its cost of capital.
this
 theory is based on rate of interest and cost of
capital

11. Walter's model
 Walter has developed a theoretical model
which shows the relationship between
dividend policies and common stocks prices.
According to him the dividend policy of a firm
is based on the relationship between the
internal rate of return (r) earned by it and the
cost of capital or required rate of return (Ke).

13. Assumptions of Walter’s Model
 All the financing is done through the retained
earnings; no external financing is used.
 The rate of return (r) and the cost of capital
(K) remain constant irrespective of any
changes in the investments.
 The earnings per share (EPS) and Dividend
per share (DPS) remains constant

14.  All the earnings are either retained or
distributed completely among the
shareholders
 The firm has a perpetual life