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Finance Management Articles
Page 26 of 96
What are the three forms of Capital Market Efficiency?
Capital Market Efficiency indicates the degree to which the present stock prices accurately reflect the current information available in the marketplace. There are three basic forms of capital market efficiency: weak form, semi-strong form, and strong form.Weak Form of Capital Market EfficiencyIn a weak capital market, only the past information of security is available. That means the weak form of capital market efficiency offers a limited window to view the future trends of a share price. It is not possible for analysts to predict the future prices of a share by following the capital market indices. It happens due to the ...
Read MoreWhy do companies opt for Stock Split?
A share split is considered a way to make investments attractive, to signal future growth and profits, and to give higher dividends to the shareholders.Making Shareholding More AttractiveWhen a stock is split, the total outstanding number of shares goes up while the market price of each share goes down. This makes the shares look more attractive and affordable. While there is no change in the net income of wealthy shareholders, the stock split offers a way for smaller shareholders to afford the ownership of large shares that have been split.In a share split, the total value of outstanding shares remains ...
Read MoreWhat are the Functions of a Merchant Banker?
Merchant banks are the most important division of financial assistance to financial institutions in developed nations. They help in improving and running the capital markets smoothly. Merchant banks, also known as investment banks, offer a variety of support and consultation services to corporate firms.In Europe, merchant banks are allowed to engage in commercial banking. This is, however, not the case in the US. In the US, merchant banks are not allowed to carry on with commercial banking. Merchant banks help develop and nurture capital markets in developing countries.With deregulation and liberalization, merchant banks have now become an important institution of ...
Read MoreWhat are the limitations of Gordon's Growth Model?
Gordon’s Growth Model, also known as the Dividend Discount Model, is a popular method to consider the value of a firm via the dividend valuation of a firm. It shows the strength of an investment project to run without any external support.As no external funds are used and the projects are funded 100% on their own, Gordon’s model is only about an imaginative model which does not care about the day-to-day conditions of dividend payout and the internal funding of projects.Limitations of Gordon's ModelSome of the most prominent limitations of Gordon’s model include the following −No External FinancingLike Walter’s model, ...
Read MoreWhat is meant by Dematerialization of Shares?
Until 1998, the share markets in India were paper-based. The securities were made of paper and during buying and selling process, these papers were exchanged from one individual to another. In 1998, computer-based exchange was used, thereby, almost all shares were converted to electronic forms and electronic transfer of shares was initiated.In electronic form, the shares were kept in a depository. This form of the depository of shares was named Demat (from dematerialization) form and since then a very high proportion of companies started to use the electronic forms of shares. Nowadays, almost all the share transactions are electronic and ...
Read MoreWhat is Lintner's Dividend Behavior Model?
It is known that there can be two types of stability of dividends. One is the constant payout, while the other is the constant payout ratio. The latter usually results in fluctuating payments at different instances of payout. So, what do managers of companies think about paying the dividends in the constant payout ratio mode?Lintner's ModelIt was John Lintner, a professor from the Harvard Business School, who proposed a model in the year 1956 to help companies determine an optimal corporate dividend policy. His model stressed on the following two points −What should be a company's target payout ratio?And, the ...
Read MoreWhy do companies buyback their shares?
Share buyback is the process by which a company repurchases its own shares from the investors. It results in a decrease in the total number of outstanding shares which in turn increases the value of shares.Companies may tend to buy shares back for a host of reasons. Some of the reasons for share buyback are as follows −Too Much Cash with Very Few Investment OpportunitiesMature companies that have with too much cash on their books but too few opportunities to invest money can resort to share buyback in order to increase the value of shares. The expense in the form ...
Read MoreWhat are the three forms of Stability of Dividend?
It has been observed that most shareholders prefer the stability of dividend payouts. The firms may choose to pay dividends in regular intervals to satisfy the needs of the shareholders. Although the amount of dividend paid may change a little from year to year, payouts made every year is usually considered a wise policy.There are three forms of stability of dividends −Constant Dividend Per ShareConstant PayoutConstant Dividend Per Share Plus Extra dividendNow, let's analyze each of these forms in detail.Constant Dividend Per ShareIn some countries, companies prefer to pay dividends which are a portion of the paid-up capital. It is ...
Read MoreWhat is the process of Book Building and Price Discovery?
Book Building is a method of pricing the shares in the market. There are usually two types of share pricing methods −The Fixed Priced Method −The price of shares when issued remains constant and fixed. The price is usually mentioned before the IPO and the investors are aware of the fixed price of each share.The Book Building Method − There is no fixed price. Instead, there are limits (a lowest and the highest price) in which the shares are traded. When the IPO takes place, the issuers of the securities adjust the price depending on the demand of the shares ...
Read MoreWhat are the essentials of Walter's Dividend Model?
Walter's model is one of the most important theories of dividend in financial management. Proposed by Professor James E. Walter, the model states that the dividend policy is a precursor of the value of a company. As companies pay dividends depending on the earnings, the payout of dividends can show how much the company was valued.Walter's model is based on the relationship between a company's Internal Rate of Return (IRR) and the Cost of Capital (CoC). These two factors are used to find the dividend theory that will reflect the want of the company to maximize the shareholder's wealth. As ...
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