Dividend Policy

St efficacy of divid close insurance policy. in that location whitethorn be trey types of dividend policy (1)Strict or Conservative dividend Policy which envisages the memory of win on the damage of dividend concede- pop(a). It helps in beef up the fiscal position of the phoner (2) cushy Dividend Policy which views the remune symmetryn of dividend at the maximum localize possible victorious in view the certain earing of the community. Under such policy comp some(pre token(a)) retains the minimum possible clams (3)Stable Dividend Policy suggests a mid-way of the higher up ii views. Under this policy, stable or almost stable position of dividend is maintained.Comp either maintains reserves in the course of studys of prosperity and uses them in paying dividend in contestation year. If comp either issue forths stable dividend policy, the mart damage of tis sh atomic number 18s sh building block be high. at that place ar drives why investors prefer stable divi dend policy. Main soils are- 1. Confidence Among Shareholders. A regular and stable dividend payment may serve to resolve incertitude in the minds of percentageholders. The smart set resorts non to knap the dividend tell even if its meshworks are lower. It maintains the tread of dividends by appropriating the property from its reserves.Stable dividend pitchs a bright prox of the companionship and thus applys the confidence of the partholders an the good leave alone of the gild increases in the eyeball of the general investors. 2. Income Conscious Investors. The second constituent favoring stable dividend policy is that about investors are income conscious and favor a stable vagabond of dividend. They too, never favour an unstable rte of dividend. A Stable dividend policy may withal satisfy such investors. 3. Stability in Market Price of Shares. some sepa pasture things beings equalise, the commercialise legal injury very with the rate of dividend the gu ild declares on its blondness fates.The economic look on of shares of a society having a stable dividend policy fluctuates non wide even if the loot of the company turn down. Thus, this policy yellowish brown the marketplace set of the old-hat. 4. Encouragement to Institutional Investors. A stable dividend policy attracts enthronement fundss from institutional investors such institutional investors broadly speaking prepare a lean of securities, mainly incorporating the securities of the companies having stable dividend policy in which they invest their surpluses or their big term cash in hand such as pensions or provident funds etc.In this way, stability and regularity of dividends non only carry ons the market determine of shares notwithstanding as well as increases the general credit of the company that pays the company in the foresighted run. Factors Affecting Dividend Policy A number of make outations affect the dividend policy of company. The major genes are 1. Stability of Earnings. The nature of business has an important bearing on the dividend policy. Industrial units having stability of cabbage may stratumulate a to a greater extent consistent dividend policy than those having an uneven flow of incomes because they apprise predict comfortably their savings and makeings.Usually, enterprises dealing in necessities suffer less from oscillating net profit than those dealing in luxuries or fancy goods. 2. Age of flowerpot. Age of the corporation counts a good deal in decision fashioning the dividend policy. A upstartly established company may require much of its makeings for elaborateness and excogitatet service and may adopt a rigid dividend policy while, on the former(a) hand, an older company rear formulate a clear cut and more consistent policy regarding dividend. 3. Liquidity of Funds.Availability of cash and sound fiscal position is also an important incidentor in dividend decisions. A dividend represents a ca sh outflow, the greater the funds and the smooth-spokenity of the firm the go bad the ability to pay dividend. The liquidity of a firm depends very much on the investment and financial decisions of the firm which in turn determines the rate of elaborateness and the manner of financing. If cash position is weak, neckcloth dividend result be grappled and if cash position is good, company can diffuse the cash dividend. 4. Extent of share Distribution.Nature of ownership also affects the dividend decisions. A closely held company is likely to clear the assent of the shareowners for the suspension of dividend or for following a conservative dividend policy. On the other hand, a company having a good number of shareholders widely distributed and forming low or medium income group, would face a great worry in securing such assent because they will emphasise to distribute higher dividend. 5. Needs for Additional Capital. Companies retain a cleave of their gain for strengthening their financial position.The income may be conserved for meeting the change magnitude requirements of work seat of government or of future expansion. Small companies usually find difficulties in raising finance for their involve of increased working capital for expansion programmes. They having no other alternative, use their plowed back meshing. Thus, such Companies distribute dividend at low rates and retain a big part of do goods. 6. Trade Cycles. Business cycles also exercise influence upon dividend Policy. Dividend policy is adjust according to the business oscillations.During the boom, prudent management creates food reserves for contingencies which follow the inflationary detail. Higher rates of dividend can be used as a tool for marketing the securities in an otherwise depressed market. The financial solvency can be proved and maintained by the companies in irksome years if the adequate reserves involve been built up. 7. Government Policies. The requital power of the enterprise is widely affected by the change in fiscal, industrial, labour, master and other government policies.Some time government restricts the dispersal of dividend beyond a genuine percentage in a particular industry or in all spheres of business activity as was done in come inncy. The dividend policy has to be modified or formulated accordingly in those enterprises. 8. assessation Policy. High taxation reduces the earnings of he companies and consequently the rate of dividend is lowered down. Sometimes government levies dividend-tax of distribution of dividend beyond a certain pay off. It also affects the capital formation. N India, dividends beyond 10 % of aid-up capital are subject to dividend tax at 7. 5 %. 9. Legal Requirements. In deciding on the dividend, the directors pick up the legal requirements too into consideration. In order to nurture the interests of creditors an outsiders, the companies Act 1956 prescribes certain guidelines in respect of the dist ribution and payment of dividend. Moreover, a company is demand to provide for depreciation on its heady and manifest assets before declaring dividend on shares. It proposes that Dividend should not be distributed out of capita, in any incident.Likewise, contractual promise should also be fulfilled, for example, payment of dividend on discernment shares in priority over ordinary dividend. 10. Past dividend Rates. era formulating the Dividend Policy, the directors moldiness keep in mind the dividend paying in past years. The watercourse rate should be around the average past rat. If it has been abnormally increased the shares will be subjected to speculation. In a new concern, the company should consider the dividend policy of the rival organisation. 11. Ability to Borrow.Well established and large firms switch better access to the capital market than the new Companies and may borrow funds from the external sources if thither arises any need. Such Companies may suffer a be tter dividend pay-out ratio. Whereas smaller firms go for to depend on their internal sources and consequently they will have to built up good reserves by reducing the dividend pay out ratio for meeting any obligation requiring heavy funds. 12. Policy of Control. Policy of control is another ascertain factor is so far as dividends are concerned.If the directors want to have control on company, they would not like to add new shareholders and therefore, declare a dividend at low rate. Because by adding new shareholders they fear dilution of control and pastime of policies and programmes of the existing management. So they prefer to meet the inescapably through hold earing. If the directors do not bother about the control of affairs they will follow a liberal dividend policy. Thus control is an influencing factor in framing the dividend policy. 13. Repayments of Loan. A company having loan indebtedness are vowed to a igh rate of guardianship earnings, unless one other arrangem ents are made for the salvation of debt on maturity. It will naturally lower down the rate of dividend. Sometimes, the lenders (mostly institutional lenders) put restrictions on the dividend distribution still such time their loan is outstanding. Formal loan contracts generally provide a certain nonplus of liquidity and solvency to be maintained. Management is bound to hour such restrictions and to limit the rate of dividend payout. 14. Time for Payment of Dividend. When should the dividend be paying is another consideration.Payment of dividend factor outflow of cash. It is, therefore, desirable to distribute dividend at a time when is to the lowest course needed by the company because there are peak times as well as lean periods of expenditure. Wise management should plan the payment of dividend in such a manner that there is no cash outflow at a time when the under winning is already in need of urgent finances. 15. Regularity and stability in Dividend Payment. Dividends shou ld be paid regularly because each investor is elicit in the regular payment of dividend.The management should, inspite of regular payment of dividend, consider that the rate of dividend should be all the most uninterrupted. For this purpose sometimes companies maintain dividend Meaning and Types of Dividend The profits of a company when made available for the distribution among its shareholders are called dividend. The dividend may be as a fixed one-year percentage of paid up capital as in the compositors reference of preference shares or it may vary according to the prosperity of the company as in the case of ordinary shares.The decision for distributing or paying a dividend is taken in the meeting of Board of Directors and in confirmed generally by the annual general meeting of the shareholders. The dividend can be state only out of divisible profits, remained after setting of all the expenses, transferring the reasonable amount of profit to reserve fund and providing for de preciation and taxation for the year. It blottos if in any year, there is not profits, no dividend shall be distributed that year.The shareholders cannot insist upon the company to declared the dividend. It is solely the discretion of the directors. Aunt hinted that the dividend was an income of the owners of the corporation which they stimulated in the capacity of the owner. Distribution of dividend involves reduction of current assets (cash) but not always. Stock dividend or bonus shares is an exception to it Basic Issues Involved in Dividend Policy thither are certain basic perplexitys which are Involved in determining the sound dividend policy. Such questions are- 1.Cost of Capital. Cost of capital is one of the considerations for taking a decision whether to distribute dividend or not. As decision making tool, the Board calculates the ratio of rupee profits that the business wears to earn (Ra) to the rupee, profits that the shareholders can expect to earn outside (Rc) i. e. , Rs. /Rc. If the ratio is less than one, it is a signal to distribute dividend and if it is more than one, the distribution of dividend will be discontinued. 2. actualization of Objectives. The main quarrys of the firm i. e. maximization of wealth for shareholders including there current rate of dividend-should also be aimed at in formulating the dividend policy. 3. Shareholders Group. Dividend policy affects the shareholders group. It means a company with low pay-out an heavy reinvestment attracts shareholders interested in capital gains earlier than n current income whereas a company with high dividend pay-out attracts those who are interested in current income. 4. Release of Corporate earnings. Dividend distribution is taking as a mens of distributing unused funds.Dividend policy affects the shareholders wealth by varying its dividend pay = out ratio. In Dividend policy, the financial manager decides whether to release Corporate earnings or not. These are certain basic issue s Involved in formulating a Dividend policy. Dividend policy to a large extent affects the financial structure, the flow of funds, liquidity, stock equipment casualtys and in the last shareholders satisfaction. That is why management exercises a high degree of judgment establishing a sound dividend pattern.Dividend PolicyDividend Policy Vinod Kothari Corporations earn profits they do not distribute all of it. Part of profit is ploughed back or held back as retained earnings. Part of the profit gets distributed to the shareholders. The part that is distributed is the dividend. The ratio of the actual distribution or dividend, and the constitutional distributable profits, is called dividend payout ratio. How much of its profits should a corporation distribute? There are some(prenominal) considerations that apply in answering this question. Hence, companies have to frame and work on a definitive policy of dividend payout ratio.Of course, no corporate management can afford to stick to a fixed dividend payout ratio year after year neither is such fixity of dividend payout ratio required or evaluate. However, management has to broadly decide its policy on its broad spatial relation towards distribution liberal dividend payout ratio, or conservative dividend payout ratio, etc. If one were to enquire this question in context of debt sources of capital for example, how much interest should a corporation pay to its bankers, the answer is straight forward. As interest paid is the cost of the borrowing, the lesser the interest a corporation pays, the better it is.Besides, companies do not have choice on paying of interest to lenders as the rate of interest is contractually fixed. Rate of dividends may be fixed in case of preference shares too. However, in case of lawfulness shares, there is no fixed rate of dividends. It cannot be said that the dividend paid is the cost of paleness capital if that was the case, corporations may try to minimize the dividend d istribution. Hence, the following bespeaks emerge as regards the dividend distribution policy The cost of candor is defined as the rate at which the corporation must earn on its right to keep the market price of the equity shares uninterrupted.Let us further conceive of that the market price of the shares is obtained by capitalizing the earnings of the corporation at a certain capitalization rate the capitalization rate itself depending on the danger or beta of the industry. Suppose the corporation does not earn any profit. Shareholders were expecting a certain rate of draw on their share guardianship thus, share prices will fall at the expected return on equity. On the other hand, if just the expected rate of return is earned by the corporation, the price of equity shares remains constant if the earnings are inviolately distributed, and xactly grows by the expected rate of return if the earnings are entirely retained. The above discussion leads to the conclusion that th e cost of equity is not the dividends but the return on equity hence, a corporation cannot work on the objective of minimizing dividends. Equity shareholders are the owners of the corporation hence, retained earnings ultimately start to the shareholders. Supposing a company earns return on equity of 10%, and retains the whole of it, the retained earnings increase the net asset value (NAV) of the equity shares on the button at the rate of 10%.Assuming there are no other factors affecting the equity price of the company, the market price of the shares should exactly go up by 10% commensurate with the increase in the NAV of the shares. That is to say, shareholders gain by way of postponement in market price to the extent of 10%. On the other hand, if the company distributes the entire earnings, shareholders earn a cash return of 10%, and there is no advert on the NAV of the shares, hence, the same should remain unchanged.Therefore, in both the cases, the shareholders earned a return of 10% in the first case, by way of offshoot or capital appreciation, and in the second case, by way of income. In other words, merely because the corporation is not distributing profits does not mean it is depriving shareholders of the rate of return on equity. The above two points reflect the stolidity, sometimes referred to as irrelevancy of dividend policy (see Modigliani and moth miller apostrophize later in this Chapter) from the viewpoint of either the company or its shareholders. Supposing the corporation decides to retain the entire earning.Obviously, the corporation would earn on this retained profit at the relevant return on equity. Note that the return on equity is relevant, as retained earnings would be leveraged and would, therefore, benefit from the impact of leverage too. On the other hand, if the corporation were to distribute the entire profits, shareholders reinvest/consume the income so distributed at their own rate of return. Hence, it may be con tended that whether the company retains or distributes the earnings depends on whose reinvestment rate is higher that of the company or that of the shareholders?Quite clearly, the rate of reinvestment in the hands of the corporation is higher than that in the hands of the shareholders, (a) because of leverage which shareholders may not be able to garner and (b) intuitively, that is the very reason for the shareholders to invest in the company in the first place. This melody generally favors retention of profits by the company rather than distribution. As we discuss later, this wrinkle is the basis of the Walter formula As a counter argument to this, it is contended that shareholders do not need addition only they need current income too.Many investors may birth their livelihood on dividend earnings. Of what avail is the increase in market value of shares, if I need cash to spend for my expenses? However, in the age of demat securities and liquid stock markets, harvest-tide a nd income are almost equivalent. For example, if I am holding equity shares expenditure $ 100, which appreciate in value to $ 110 imputable to retention, I can dispose off 10/110% of my shareholding, earn cash equal to $ 10, and still be left with stock worth $ 100, which is exactly the same as earning cash dividend of $ 10 with no retention at all.While the above argument may point to indifference amidst growth and income, the reality of the marketplace is that investors do have varying preferences for growth and income. There are investors who are growth-inclined, and there are those who are income-inclined. volume of retail investors insist on balance among growth and income, as they do not see an exact equivalence between appreciation in market value and current cashflows. Hence, the conclusion that emerges is that companies do have to strike a balance between shareholders need for current income, and growth opportunities by retained earnings.Hence, dividend policy still rem ains an important consideration. While making the above points, there are certain special points that affect particular situation that need to be borne in mind bon tons reinvestment rate lower than that of shareholders Sometimes, there are companies that do not have significant reinvestment opportunities. More precisely, we say the reinvestment rate of the company is lesser than the reinvestment rate of shareholders. In such cases, obviously, it is better to pay earnings out than to retain them.As the classic theories of impact of dividends on market value of a share (see Walters formula below) suggest, or what is anyway intuitively understandable, retention of earnings makes sense only where the reinvestment rate of the company is higher than that of shareholders. Tax disparities between current dividends and growth In our discussion on indifference between current dividends and share price appreciation, we have mistaken that taxes do not play a spoilsport. In fact, quite often , they do.For example, if a company distributes dividends, the same may be taxed (either as income in the hands of shareholders, or by way of tax on distribution like dividend distribution tax in India). Alternatively, if the shareholders have a capital appreciation, which they encash by partial(p) liquidation of holdings, shareholders have a capital gain. Taxability of a capital gain may not be the same as that of dividends. Hence, taxes may tick between current dividends and share price appreciation. Shares with fixed returns Needless to say, there is no relevance of dividend policy where dividends are payable as per hurt of issue for example, in case of preference shares. Entities requiring minimum distribution There might also be situations where entities are required to do a minimum distribution under regulations. For example, in case of real domain investment trusts, a certain minimum distribution is required to clear tax transparent status. There might be other regula tions or regulatory motivations for companies to distribute their profits.These regulations may impact our discussion on relevance of dividend policy on price of equity shares. Unlisted companies Finally, one must also note that discussion above on the proportion between distributed earnings and retained earnings the latter leading to market price appreciation will have relevance only in case of listed firms. Technically speaking, in case of over-the-counter firms too, retained earnings depart to the shareholders, as shareholders after all are the owners of the remnant wealth of the company. However, that residual ownership may be a myth as companies do not istribute assets except in event of winding, and winding up is a rarity. The discussion in this chapter on dividend policy, as far is relates to market price of equity shares, is keeping in mind listed firms. In case of unlisted firms, classical models such as Walters model or Gordon return model discussed below may hold relevance than market price-establish models. From dividends to market value of equity Dividend capitalisation approach If, for a second, we were to ignore the stock market capitalisation of a company, what is the market value of an equity share?Say, we take the case of an unlisted company. We know from our discussion on present values that the value of any asset is the value of its cashflows. What is the cashflow a shareholder gets from his equity? As long as the company is not displease up, and the shareholder does not sell the stock, the only cashflow of the shareholder is the dividends he gets. It is tardily to understand that if we are not envisaging either a sale of the shares or a liquidation of the company, then the stream of dividends may be demandd to continue in perpetuity. Hence, VE = ? ? (1 + K i =1 Di E )i (1)Where VE encourage of equity K E Cost of equity Di dividends in paid in year i comparability (1) is easy to understand. Shareholders continue to receive d ividends year after year, and these dividends are discounted by the shareholders at the cost of equity, that is, the required return of the shareholders. If the stream of dividends is constant, then Equation (1) is actually a nonrepresentational progression. We can manipulate Equation (1) either to compute the price of equity, if the constant stream of dividends is known, or to compute the cost of equity, if the dividend rate and market price of the shares is known.Applying the geographical progression formula for adding up perpetual progressions, assuming constant dividends equal to D, Equation (1) above becomes VE = = D (1 + K E ) ? (1 ? 1 ) 1+ KE (2) D KE interpreter Supposing a company the nominal value equity were $ 100, and the dividends at the rate of 10 % were $ 10, if the cost of equity is 8%, then the market price of the shares will given(p) by 10/8%, or $ 125. Incorporating growth in dividendsIn our over-simplified example above, we have taken dividends to be constant. It would be unusual to expect that dividends will be constant, particularly where the company is not distributing all its earnings. That is to say, with the retained earnings, the company has increase profits in successive years, and therefore, it continues to distribute more. If dividends grow at a certain compounded rate, say g, then, Equation (2) above becomes VE = D (1 + g ) (1 + K E ) = ? (1 ? 1+ g ) 1+ KE (3) D (1 + g ) KE ? gNote that we have assumed here that even the first dividend will have grown at g rate, that is, the historical dividend has been D, but we are expecting the current years dividend to have increased at the constant rate. If we assume the current years dividend will not show the growth, and the growth will come from the forthcoming year, then we can remove (1+g) in the numerator above. The formula as it stands is also referred as Gordons dividend growth formula, discussed below. Example Supposing a company the nominal value equity were $ 100, and the divid ends at the rate of 10 % were historically $10.Going forward, we expect that the dividends will continue to grow at a rate of 5% per annum. If the cost of equity is 8%, what is the market value? We put the numbers in the formula and get a value of $350. Note that we can also test the valuation above on Excel. If we take sufficient number of dividends, say, 1000, successively growing at the rate of 5%, and we discount the entire stream at 8%, we will get the same value. Example Supposing a company the nominal value equity were $ 100, and the dividends at the rate of 10 % were historically $10.Going forward, we expect that the dividends will continue to grow at a rate of 12% per annum. If the cost of equity is 8%, what is the market value? This is a case where the growth in dividends is higher than the discounting rate. The growth in dividends is a multiplier factor the discounting rate is a divisor. If the multiplier is higher than the divisor, then the present value of each success ive dividend will be higher than the previous one, and hence a perpetual series will have infinite value. There is yet another notable point the growth rate g above may be also be visualised as the appreciation in the market value of the share.That is, shareholders are rewarded in form of current earnings as well as growth in the value of their investment. Dividend-based equity models Walter Approach The Walter formula belongs to James E Walter, and is based on a easy argument that where the reinvestment rate, that is, rate of return that the company may earn on retained earnings, is higher than cost of equity (which, as we have discussed before, the expected returns of the shareholders, or rate of return of the shareholders), then, it would be in the interest of the firm to retain the earnings.If the companys reinvestment rate on retained earnings is the less than shareholders rate of return, the company should not retain earnings. If the two rates are the same, then the company should be indifferent between retaining and distributing. The Walter formula is based on a simple analysis that the market value of equity is the capitalisation of the current earnings and growth in price (g in our formula in equivalence 3 above). Hence, the basis of Walter formula is VE = D +g KE (4) Here, the growth factor occurs because the rate of return on retention done by the company is higher than the cost of equity.That is to say, the company continues to earn at r rate of return on the retained earnings, and this is what causes growth g. Hence, g= r (E-D)/ K E Inserting comparisons (5) into (4), we have VE = (5) D KE + r (E D)/K E KE (6) Where r = rate of return on retained earnings of the company E = earnings rate D = dividend rate Example Supposing a company the nominal value equity is $ 100, and the dividends at the rate of 10 % are $10. Supposing the company earns at the rate of 12% , what is the market value of equity if the the cost of equity is 8%?The market valu e of the share comes to $ 162. 50. This is explicable easily. As the company is earning $12, and distributing $10, it retains $ 2 every year, on which it earns at 12%. The capitalised value of 0. 24 at 8% will be the expected growth. Therefore, the sustainable earnings of the shareholders will be $ 10 +3, which, when capitalised at 8%, produces the value $ 162. 50. Of course, the key learning from Walters approach is not what the market value of equity is, but how the market value of equity can be maximised by following a proper distribution policy.For instance, in the present case, it is not advisable for the company to distribute any dividend at all, as the company earns more than the shareholders opportunity rate. If the company was not to distribute anything, the market value of the share may increase to $ 225. Gordon growth model Gordons growth model is simply Equation (3) above, that is, VE = D (1 + g ) KE ? g This is, as we have seen above, derived from perpetual sum of a g eometric progression, under the assumption that the growth rate is less than the cost of equity. Modigliani and Miller approachFranco Modigliani was awarded Nobel prize in 1985 and Merton Miller in 1990 (along with Markowitz and Sharpe). M&M have theorised on the irrelevance of the capital structure, and a corollary, irrelevance of the dividend payout ratio to the value of the firm. Like several financial theories, M&M speculation is based on the argument of efficient capital markets. In addition, we debate that a firm has two options (a) It retains earnings and finances its new investment plans with such retained earnings (b) It distributes dividends, and finances its new investment plans by issuing new shares.The intuitive background of the M&M approach is extremely simple, and in fact, almost selfexplanatory. It is based on the following propositions wherefore would a company retain earnings? Only tenable reason is that the company has investment opportunities. If the company does not retain earnings, where does it finance those investment opportunities from? We may assume a debt issuance, but then as M&M otherwise propounded irrelevance of the capital structure, they see a parity between debt and equity, and hence, it does not make a difference whether the new investments are funded by equity or debt.So, let us assume that the new growth plans are funded by equity. Shareholders price the equity shares of the company to take into account the earnings and the retentions of the company. If the company distributes dividends, the shareholders take into account that fact in determine of the shares if the company does not distribute dividends, that is also reflected in the pricing of the shares. If dividends are distributed, the financing needs of the company will be funded by issuing new shares. The issue price of these shares will compensate for the fact that the dividends have been distributed.That is to say, the market price of the share will remain sup erior(predicate) by whether the dividends have been distributed or not. Let us take a one year time horizon to understand the indifference argument of M&M. We use the following new notations Po P1 D1 n m I X Price of the equity share at point 0 Price of the equity share at point 1, that is, end of period 1 Dividend per share being paid in period 1 existing number of issued shares new shares to be issued Investment needs of the company in year 1 Profits of the firm year in 1 The relation between the price at the start of the year (Po), and that at he end of the year (P1) is the simple question of discounted value at the shareholders expected rate of return (KE). Hence, Po = (P1 +D1) / (1+(KE) (7) Equation (7) is quite easy to understand. Shareholders have got a cash return equal to D1 at the end of Year 1, and the share is still worth P1. Hence, discounted at the cost of equity, the discounted value is the price at the beginning of the period. Alternatively, it may also be stated that the P1 = (P0 )* (1+(KE) D1 (8) That is to say, if the company declares dividends, the price the end of year 1 comes down to the effect of the distribution.Equation (7) can be manipulated. By multiplying both sides by n, and adding a self-cancelling number m, we may write (7) as follows nPo = (n+m)P1 -mP1 +nD1)/(1+(KE) (9) Note that we have multiplied both sides by n, and the added number m along with m is cancelled by deducting the same outside the brackets. mP1 represents the new share capital raised by the company to finance its investment needs. How much share capital would the company need to raise? Given the investment needs I and the profits X, the new capital issued will be given by the following mP1 = I (X nD1) (10)Again, this is not difficult to understand, as the add amount of profit of the company is X, and the total amount distributed as dividends is nD1. Hence, the company is left with a funding gap as shown by equation (10). If the value of mP1 is subst ituted in Equation (9), we have the following nPo = (n+m)P1 I (X nD1)+nD1)/(1+(KE) (11) As nD1 would cancel out, we will be left with the following nPo = (n+m)P1 I + X /(1+(KE) (12) Since nPo is total value of the stock at point 0, it is seen from Equation (12) that dividend is not a factor in that valuation at all.