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Gordon's Model and MM Model of Dividend Policy

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Gordon’s model and MM model Gordon's Model and MM Model of Dividend Policy 1. Gordon's Model Myron Gordon's Model is a dividend relevance theory . It states that the dividend policy of a company affects the market value of its shares . The model is based on the idea that investors generally prefer certain current dividends rather than uncertain future capital gains. This is often referred to as the "bird-in-the-hand" argument . Gordon's Formula                         Where: P₀ = Current market price per share E = Earnings per share b = Retention ratio r = Rate of return on investment Ke = Cost of equity capital Dividend payout ratio = 1 − b Main Principle The relationship between r and Ke determines the appropriate retention/dividend approach: Situation Implication r > Ke ...
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Types of Dividend

  Types of Dividend        A dividend is the portion of a company's profit distributed to its shareholders. The major types are: Cash Dividend – Dividend paid to shareholders in cash. Interim Dividend – Dividend declared and paid during the financial year before the annual accounts are finally approved. Final Dividend – Dividend recommended after the end of the financial year and declared at the company's Annual General Meeting (AGM), subject to applicable law. Stock Dividend / Bonus Shares – Distribution to shareholders in the form of additional shares instead of cash. Special Dividend – A non-recurring dividend paid in addition to the company's regular dividend. Property Dividend – Dividend distributed in the form of assets or property rather than cash. Interim Dividend vs Final Dividend Basis Interim Dividend Final Dividend Mean...
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Factors Determining Dividend Policy

Objectives of Dividend Policy To provide regular income to shareholders. To maintain shareholders' confidence. To finance future expansion through retained earnings. To maintain an appropriate balance between dividends and growth. To enhance the value of the company. Factors Determining Dividend Policy Earnings of the Company – Companies with higher and stable profits can generally pay higher dividends. Stability of Earnings – Stable earnings enable a company to maintain a consistent dividend. Cash Position – Dividend payment requires sufficient cash. A profitable company may not be able to pay dividends if its cash position is weak. Growth Opportunities – Companies with significant expansion opportunities may retain more profits instead of distributing them. Need for Funds – The company's requirements for working capital, expansion and modernization influence dividend decision...
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Dividend Policy – Introduction

  Dividend Policy – Introduction Dividend policy refers to the policy or decision of a company regarding the distribution of its profits to shareholders in the form of dividends and the retention of the remaining profits for future business needs . A company generally has two choices when it earns profits: Distribute profits to shareholders as dividends. Retain profits in the business for expansion, working capital, debt repayment, or other purposes. Thus, dividend policy determines the portion of earnings paid to shareholders and the portion retained by the company . Objectives of Dividend Policy To provide regular income to shareholders. To maintain shareholders' confidence. To finance future expansion through retained earnings. To maintain an appropriate balance between dividends and growth. To enhance the value of the company. Factors Determining Dividend Policy Earnings of the Company – Companies with higher and stable profits can generally pay h...
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