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BRILLIANT’S Dividend Decision 243

almost always affects the value of the firm. h_oem à^m{dV H$aVm h¡Ÿ& dmëQ>a Ho$ AZwgma, BZdoñQ>_oÝQ>
According to him, investment policy and nm°{cgr Ed§ {S>{dS>oÝS> nm°{cgr XmoZm| EH$-Xygao go Ow‹S>r hþB©
dividend policy both are interlinked. His model hmoVr h¡Ÿ& Bg _m°S>c Zo {S>{dS>oÝS> nm°{cgr kmV H$aZo _| \$_©
clearly shows the importance of the
relationship between the firm's internal rate H$s H$m°ñQ> Am°\$ H¡${nQ>c (K) Ed§ BÝQ>aZc aoQ> Am°\$ [aQ>Z©
of return (r), and its cost of capital (K) in (r) Ho$ _Ü` g§~§Y Ho$ _hËd H$mo ñnï> ê$n go Xem©`m h¡,
determining the dividend policy, which will {Oggo \$_© H$s d¡ë`y CÀMV_ hmoJrŸ&
maximize the value of the firm.
The key argument in support of Walter's \$_© Ho$ BZdoñQ>_oÝQ> na [aQ>Z© (r) Ed§ CgH$s H$m°ñQ>
model is the relationship between the return Am°\$ H¡${nQ>c (K) Ho$ _Ü` g§~§Y dmëQ>g© _m°S>c Ho$ gh`moJ
on a firm's investment (r) and its cost of capital _| EH$ _w»` VH©$ h¡Ÿ& \$_© Ho$ nmg EH$ Am°pßQ>__ {S>{dS>oÝS>
(K). The firm would have an optimum dividend
policy which will be determined by the nm°{cgr hmoJr {Ogo r Ed§ K Ho$ ~rM g§~§Y Ûmam kmV hmoJrŸ&
relationship between r and K. If the return on `{X BZdoñQ>_oÝQ> na [aQ>Z©, H¡${nQ>c H$s H$m°ñQ> go Á`mXm h¡
investment is greater than cost of capital (r > K) Vmo \$_©, eo`a hmoëS>g© {OVZm nwZ: BÝdoñQ>_|Q> Ûmam
(r > K), the firm is able to earn more than what
the shareholders could earn by re-investing. A{O©V H$a gH$Vo h¢,Ÿgo Á`mXm A{O©V H$aZo _| g_W© hmoJrŸ&
On the other hand, if r < K, the shareholders Xygar Amoa, `{X r < K Vmo eo`a hmoëS>g© AÝ` _| BÝdoñQ>_|Q>
can earn a higher return by investing elsewhere. H$aHo$ hm`a [aQ>©Ýg A{O©V H$a gH$Vo h¡Ÿ&
For the purpose of understanding {S>{dS>oÝS> nm°{cgr Ed§ eo`a H$s d¡ë`y H$mo g_PZo Ho$
dividend policy and the value of share, firms CÔoí` go \$åg© H$mo {ZåZ[c{IV VrZ lo{U`m| _| dJuH¥$V
are classified into three categories:
{H$`m J`m:
(i) Growth firm (r > K) (i) J«moW \$_© (r > K)
(ii) Normal firm (r = K) (ii) Zm°_©c \$_© (r = K)
(iii) Declining firm (r < K) (iii){S>ŠcmBqZJ \$_© (r < K)
(i) Growth Firms (r > K): Growth firms are (i) J«moW \$_© (r > K): J«moW \$åg© do h¢ Omo {dñV¥V
those which expand rapidly because of ample BZdoñQ>_oÝQ> Anm°À`y©{ZQ>rO Ho$ H$maU VoOr go {dH${gV
investment opportunities. These firms are able hmoVr h¡Ÿ& `o \$åg© [a-BÝdoñQ>_|Q> Ûmam CÀMV_ Xa go
to earn at a higher rate by reinvesting than the
rate expected by shareholders. They will maxi- A{O©V H$aZo _| g_W© hmoVr h¡Ÿ& `{X do BÝQ>Z©c BÝdoñQ>_oÝQ²>g
mize the value per share if they follow a policy Ho$ {cE g^r A{Zª½g H$mo gwa{jV aIZo H$s nm°{cgr H$m
of retaining all earnings for internal investments. nmcZ H$aVo h¢ Vmo n«{V eo`a H$s d¡ë`y ~‹T> OmEJrŸ&
(ii) Normal Firms (r = K): Most of the firms (ii) Zm°_©c \$åg© (r = K): A{YH$m§e \$åg© Ho$ nmg
do not have unlimited investment opportuni- Agr{_V BZdoñQ>_oÝQ> Anm°À`y©{ZQ>rO Zht hmoVrŸ& BZ
ties. After availing such opportunities, these Anm°À`y©{ZQ>rO H$m cm^ CR>mZo Ho$ níMmV `o \$åg© CZHo$
firms earn on their investment equal to the
BZdoñQ>_oÝQ> na H¡${nQ>c H$s H$m°ñQ> Ho$ ~am~a (r = K) A{O©V
cost of capital r = K. For normal firms with
r = K, the dividend policy has no effect on the H$aVr h¡Ÿ& r = K dmcr \$åg© Ho$ {cE, {S>{dS>oÝS> nm°{cgr H$m
market value per share. à{V eo`a H$s _mH}$Q> d¡ë`y na H$moB© à^md Zht n‹S>VmŸ&
(iii) Declining Firms (r < K): Some of the (iii) {S>ŠcmBqZJ \$åg© (r < K): Hw$N> \$åg© Ho$ nmg
firms do not have any profitable investment AnZr A{Zª½g H$mo BÝdoñQ>_|Q> H$aZo H$s H$moB© ^r àm°{\$Q>o~c