hhenselves, though they are actually caused by an underlying revision of the cssimate of earnings potential TE Terminal Questions Describe the Modigliani and Millers irrelevance theory of dividend. 2. Discuss the assumptions and implications of Walter’s relevance theory of dividend, 3, What are the assumptions and implications of Gordon’s theory of dividend? Ta weterence Financial Management ~ by Prasanna Chandra Financial Management - by .M. Pandey Financial Management - by P.V. Kulkarni Financial Management - by M.Y. Khanna Jain Pr Karnataka State Open University Manasagangothri, Mysore - 570 006, Master of Business Administration (MBA) COURSE- IX: FINANCIAL MANAGEMENT MODULE ITS 5 1t02 a Unit-1: Divident Policy Decisions : An Introduction vii Unit-2 Dividend Theories 14-24 ooCourse Design and Editorial Committee ~ __ Prof. B.A. Viveka Rai Prof. Jagadeesha Vice-Chancellor & Chaigerson e Dean (Academie) - Convenoe Kauaiks Stat Open University Kamatak State Open Universty Manasagangtiri, Mysore 570006 Manasagangoth, Mysore - 570006 Dr Jagadeesha Chazperson Department of Studies and Research in Management Kamataka State Open Unversity Manssagangit, Mysore 570006 SSS ‘Stunna D. ARK Course Co-ordinator Lect egret of Sues and Research in Mange Kamath Sita Open Univers, Managing, Mysore -570006 7 conRENeRTER MODULES i Shrinivasa-D. ARK Units 1-2 ‘Lester Depart of Sues and Research in Mange Kamat Sate pe University Manesagnghr, Mysore -570006 eee Developed b Academic Seton, KSOU; Mysore ‘Karnataka SuateOpen University, 9903 Aight reserved Uo par: of this work may be reproduced in any form, by mitmeogcph oan oer ‘means, without permission in wrt fom the Karnataka State Open University Fuster information on the Karnataka State Open Univesity Programmes may obtained from the University’s Offic at Manasagangotr, Mysore 6. Printed and Published on baba of Karatake State Open University, Mysore - 570-006, ty ‘The Registrar Administration), ‘Thus the basic Gordon model leads to dividend policy implications as shot of ‘Walter theory 1. The optimal payout ratio for a growth firm (t > k) is Nil. 2, ‘The payout ratio for a Normal firm is irrelevant 3. ‘The optimal payout ratio for a declining firm (e ), the price per share increases as the dividend payout ratio decreases. 2. When the rate of return is equal to the discount rate (rk), the price per share remains unchanged in response to variation in the dividend pay out ratio. 3. When the te of return is less than the discount rate (+ < ke), the price per share increases as the dividena payout ratio increases. ‘Table: Numerical examples for Gordon Theory ‘Grown Firm r> Normal firm r= k Declining firm =k += 20 per cent f= 15 per cent = 10 per cent k= 15 per cent k= 15 per cent 15 per cent Ret BERS Ib =0.25 Ifb=025 O75)-4 p= 0794 25,030) * = G15 = (025K0.10) 230 = Rs.24.00 Ib=Rs.0.50 Ib =Rs.0.50 (0504 (0508 5h P= 35-0503 15-(05}0.70) = Rs. 40 = Rs. 20.00 ‘Course IX: FINANCIAL MANAGEMENT MODULE 1IVIDEND DECISIONS INTRODUCTION In the previous module you have studied one of the important aspects of financial ‘management e,costof capital, capital budgeting and working capital management. is also ‘important to study the ther aspects of financial management, like Divident Policy. As we know dividend policy decision playsa very important rol in corporate governance In this block you wil study shout the various specs of dividend policy decisions like whats dividend, determinants of dividend policy patterns of dividend policies, forms of dividend, legal and procedural aspects relating to declaration of divident and three important theories of dividend, Intota, this block includes 2 units Dividend Policy Decisions - An Introduction : “Thicunit deals with diferent aspects of dividend policy decisions Unit-2 Dividend theories: This unit deals withthe important theories of dividend,