Dividends As An Active Decision Varlable Management must pay a dividend before investing in new projects A shortfall may arise and could be overcome in 1 of 3 possible ways reduce investment opportunities issue additional debt finance issue additional equity
Dividends As An Active Decision Variable ▪ Management must pay a dividend before investing in new projects. ▪ A shortfall may arise and could be overcome in 1 of 3 possible ways: –reduce investment opportunities; –issue additional debt finance; –issue additional equity
Dividends As An Active Decision Varlable If management decides to pay a dividend and then make up the shortfall to fund the new investments, it obviously considers dividend policy to be important Dividends are therefore an active decision variable
Dividends As An Active Decision Variable If management decides to pay a dividend and then make up the shortfall to fund the new investments, it obviously considers dividend policy to be important. Dividends are, therefore, an active decision variable
Irrelevance Argument Modigliani and Miller Earnings are what affect the value of the firm and not decisions on when earnings are distributed to investors As long as the return is constant, investors dont care about how that return is made up, ie dividend or capital aaIn
Irrelevance Argument ▪ Modigliani and Miller. ▪ Earnings are what affect the value of the firm and not decisions on when earnings are distributed to investors. ▪ As long as the return is constant, investors don’t care about how that return is made up, ie dividend or capital gain
Irrelevance Argument Do(1+g)
Irrelevance Argument ( ) k - g D P = k - g D 1+ g P = s 1 0 s 0 0
b P= e1(1-b) k -br
( ) ( ) k - b.r e 1- b = k - g e 1- b P = s 1 s 1 0