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Finance Management Articles
Page 23 of 96
What is meant by the Informational Content of Dividends?
Informational Content of DividendsDividend payout by competitive companies usually comes with statements of profitability and future growth. A successful firm uses the information to woo its current and potential investors by using promotional content about the profitability of the shares issued by the company. Thus, there is often a statement or content that is used along with dividend payouts. This is known as the informational content of dividends.Informational Content is Useful for InvestorsIt is a fact that any statement made by a profitable firm becomes stronger if it adds some dividend or cash payout to its shareholders with the informational ...
Read MoreWhy were Primary Markets not active in India until the 80s?
What is a Primary Market?There are two forms of securities markets that are differentiated based on the type of issues of securities in them.The primary market is for the new security issuance, while the secondary market is for the purchase and sale of already existing securities.As the primary markets deal only in new securities, they are also called new issues markets.Primary Market Vs Secondary MarketThe issued securities are bought and sold in the secondary market that is also known as the stock market. The stock market is a second-hand security market that deals in all listed securities.In a primary market, ...
Read MoreWhat are the Advantages and Disadvantages of Mutual Funds?
Mutual funds pool investments of like-minded investors and invest the cumulative sum in large and diversified investment projects. This helps small investors access big projects which they might not access individually.Advantages of Mutual FundsThere are some distinct benefits of mutual funds such as the following −SimplicityMutual funds are an easy means for small investors who do not have quite a good knowledge of the stock market or the shares being traded in the markets.Small investors who cannot access large projects can simply invest money in small amounts which are pooled by the mutual funds and invested in the market.The investors ...
Read MoreWhat are the assumptions of Walter’s Dividend Model?
Walter’s model is a dividend theory that considers the internal rate of return (IRR) and cost of capital to derive the valuation of a firm. The internal rate of return and cost of capital remains constant for the entire cycle of calculation. However, according to Walter’s model, the Earnings per share (EPS) and dividend per share may change.Assumptions of Walter's Dividend ModelWalter’s model of dividend theory is based on some assumptions, which are discussed below.Internal FinancingThe entire cost of a project is paid via internal financing and no new debt or equity is used in financing a firm’s project.To be ...
Read MoreWhat are the assumptions of Miller and Modigliani's Dividend Irrelevance Model?
Like Walter’s model and Gordon’s model, the Miller and Modigliani model also rests upon some assumptions. The MM model is much celebrated one due to the flexibility and exclusiveness of the theories included, which are discussed below.Perfect Capital MarketsThe MM model considers the capital markets to be perfect. This means that the markets have all rational investors. By rational, it means that all investors in the market tend to be risk averse and want to earn the maximum profits from investing in the markets.There is always a fair competition in the markets which means that all investors have the relevant ...
Read MoreWhat are the assumptions of Gordon's Dividend Model?
Gordon’s dividend model is a progression of Walter’s model as it adds some more restrictions to the theory. Gordon’s model however rests on the same assumptions Walter’s theory proposes in the very first place.Assumptions of Gordon's TheoryThe assumptions of Gordon’s theory are discussed below.All-Equity FirmGordon considers the firms to be of 100% equity. Moreover, it should not have any debt financing for calculating the dividends in practice.No External FinancingTo be considered under Gordon’s model, a company must have good financial health. In other words, the company must be able to finance all its projects by its own internal funds. No ...
Read MoreWhat are the advantages of having Stability of Dividends?
There are certain advantages of paying stable dividends over time. Some of these advantages are discussed below.Resolution of the Uncertainty of Investors’ IncomeInvestors usually get to know about the performance of a company via the dividends they earn.When a company pays stable dividends over the years, the investors understand that the company is doing good and there is no risk of staying invested in the firm.When a company increases the number of dividends, it usually does so when it can maintain the increased level in the future. So, when increased dividends are paid, it conveys a positive message to the ...
Read MoreWhat are Miller and Modigliani's arguments against uncertainty regarding Current Vs Future Dividends?
The Miller Modigliani model of dividend evaluation is one of the most influential theories in finance. It shows the relation of dividend payout and shareholder’s preferences in a new light. It asserts that shareholders prefer current payout over capital gains for a host of reasons. The most powerful among the reasons are the risks involved in the market and diversification of portfolios for which the MM model becomes more relevant.The MM model, however, does not offer a reason for difference in payout in present or future due to similar current and future dividend payouts. The MM model assumes that the ...
Read MoreWhat are Gordon's arguments regarding uncertainty of Capital Gains?
According to Myron Gordon, uncertainty increases with futurity. That is, with lapse of time, the certainty of getting a certain dividend gets diminished in value. Gordon argues that as the appropriate discount rate cannot be constant in the longer term, the payouts in the near future would be worth more than the ones in the distant future.Investors are almost always risk-averse in nature and they would prefer near-term dividends that have a lesser discount rate applicable than the dividends that are discounted more for being distant in nature. In other words, the shareholders would prefer a share that pays them ...
Read MoreWhat are the financial instruments used in India?
There are various forms of equities and debts that are used as financial instruments in India. Some of these instruments are given below.Ordinary SharesOrdinary shares offer a certain part of the ownership of the company to the shareholders. These shareholders offer permanent capital for the company’s projects. They have voting rights and can receive dividends when the board approves it.Preference SharesAs the name suggests, preference shares are preferred ones. The holders of preference shares get preference in case a company goes for liquidation.Preference shareholders must be paid dividends in case of liquidation before the ordinary shareholders.In India, companies can only ...
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