Finance coursework

The main purpose behind investing in a company’s share is the certainty of a return on investment, referred to as dividend. Therefore, investors seek to find those companies where their risk of investing is assured of returns. This implies that the dividend policy influences investment decisions. This concept is explained by the relevant dividend theories such as Gordon’s dividend theory. On the contrary, the irrelevant dividend theories give a different understanding. With reference to the Miller and Modigliani theory, a firm’s value is not based on the dividend policy but rather based on the investment policy or the company’s earning capacity. Payment or nonpayment of dividends does not affect the company’s share market price. Investment in companies without a dividend policy is based on the arbitrage concept discussed by miller and Modigliani. It is the state of capitalizing on the imbalance in the share prices between two or more markets. Investors are indifferent between retention of earnings and dividend payout due to the balancing nature of the internal and external financing factors.

The shareholders’ wealth maximization goal of the firm is a major factor influencing the value of the firm. This involves its long- term capability to create and generate funds to pay out dividends to the shareholders. However, investment managers fail to discount the cash flows and instead, base the stock selection on short term earnings. Discounting is the standard for valuing cash flows in the capital markets, expressing the future market prices into their current value equivalent. This incorporates various factors, relevant in stock valuation such as inflation. This reflects managers’ obsession; that ignores the allocative, fundamental and information efficiency that defines market efficiency.

Referenes.

Lazarus, M. H. (2010). Who regulates whom: U.S. financial oversight. New York: Nova Science.

Opportunities: 2002-03 Virginia financial aid programs.. (2002). Richmond, VA: [s.n..