Dividend Policy Decisions

29 – 4 – 2010
Dr. Mercia Selva Malar
 Fill in the blanks:
• --------- refers to that portion of a firm’s net
earnings which are paid out to the
shareholders

• There is an --------- relationship between

retained earnings and cash dividend.

• -------------- policy pays out only excess cash

 Fill in the blanks
• ---------- implies that the value of a firm is
unaffected by the distribution of dividend and is
determined solely by the earning power and risk
of its assets.

• The most comprehensive argument in support of

the irrelevance of dividends is provided by the
----------------
 Fill in the blanks
• ---------------- implies the distribution of earnings
to shareholders and raising an equal amount
externally.

• The critical assumptions of MM approach are:

----------------, ---------------------, --------------------
and -------------------.
 Fill in the blanks
• ----------------- are the different rates of taxes
applicable to dividend and capital gains.

• ----------------- is the cost involved in raising

capital from the market
 Fill in the blanks
• ------------ are costs involved in selling
securities by the shareholders

• According to Walter’s model the value of the

share is -------------- proportion to the D/P ratio
 Fill in the blanks
• The test of adequate acceptable opportunities
for the firm while considering its dividend policy
is the relation between --------- and ----------------

• Walter’s model and Gordon’s model are

applicable to firms in which all financing is
done through ------------- and with -------------
leverage.
 State True or False:

• Rising tax rates tend to depress dividends.

• Smaller the size of the issue smaller is the
percentage of floatation cost
• Effective tax rate of corporate in India is 30 per
cent
• The three models of dividend relevance are:
Walter’s model, Gordon’s Model and Miller’s
Model
• MM Model speaks of dividend irrelevance
 Answers
• Dividend
• Inverse
• Residual dividend
• Dividend irrelevance
• MM hypothesis
 Answers
• Arbitrage
• perfect capital markets, no taxes, the
given investment policy does not change
and perfect certainty on future profits and
investments
• Tax differentials
• Floatation costs
• Transaction costs
 Answers
• not related
• ROI and cost of capital
• Retained earnings, zero
 State True or False: Answers
• True
• False
• False
• False
• True