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There is a relation between the price of shares and dividends. There are two schools of thought regarding dividends. According to one school, the amount of dividend has a positive impact on the firm’s value while another school states that the dividend paid does not affect the firm’s valuation. The first school of thought is called the relevance of Dividend. For students pursuing finance, a dividend is a vital topic and many Finance students opt for Dividend Relevance assignment help from BookMyEssay. We have qualified finance experts who offer you expert assignment assistance in finance subject matter and help you score top grades.

What is Dividend Relevance?

According to the Dividend Relevance theory, dividend policy shows a positive impact on the position of the firm and the stock market. The higher dividend shall enhance the value of the stock while a low dividend can decrease the stock’s value. More dividend indicates more profitability.

If the dividend policy affects the firm’s value then it is considered relevant. In this case, a change in the payout ratio of the dividend shall be followed by a change in the firm’s market value. When a dividend is relevant, there should be an optimum payout ratio. An optimum payout ratio is a ratio that provides the greatest market value/share. If you need to buy online homework help with Dividend Relevance topic, then you can contact BookMyEssay experts.

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Dividend Relevance Theory (Walter’s Model)

Prof. James Walter says that the choice of a dividend payout ratio affects the value of a firm. He studied the importance of the relationship between the cost of capital (k), internal rate of return (R) to find out the optimum dividend policy that maximizes the shareholders’ wealth.

The assumptions of which Walter’s model is based is highlighted in our Dividend Relevance assignment help in AUS as follows:

  • The firm finances the entire investments through retaining earnings only.
  • The cost of capital (k) and the internal rate of return (R) of a form stays constant.
  • The earnings of a firm are either reinvested or distributed as dividends internally.
  • The dividends and the earnings of a firm shall never change
  • The firm has an infinite or a long life

The formula to find out the price/share is:

P is the market price/share

E is earnings per share

D is the dividend per share

K is the cost of capital

R is the internal rate of return

As per this theory, the dividend policy depends on the relationship between the cost of capital and the internal rate of return of the firm. IF R is greater than K, a firm must retain all the earnings, however, if R is lesser than the cost of capital, it should distribute its earnings to the shareholders

The theory may be summarized below as follows:

  • Growth firms mean R>K. They have huge investment opportunities
  • Normal Firms R=K. These firms earn a return that is equal to the shareholders. The payout ratios are optimum.
  • Declining firms means R

Gordon’s Model

Another dividend relevance theory is Gordon’s model. According to this model, a dividend policy affects the value of a firm based on the assumptions that are stated in our online help with assignment on Dividend Relevance as follows:

  • The firm is an all-equity firm and no debt
  • The internal rate of return or R remains constant
  • There is no external financing and the investments are financed by retained earnings exclusively.
  • The cost of capital stays fixed irrespective of the change in the risk of a firm
  • The firm gets its income in perpetuity
  • The retention ratio is constant and the growth rate is constant too
  • Corporate taxes do not exist
  • K is greater than g

P is the price per share

E is earnings per share

K is the cost of capital

b is retention ratio

G is the growth rate

(1-b) is the payout ratio

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