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252 Corporate Finance BRILLIANT’S

Payout Ratio, (1 - b) = 90%, Retention ratio, b = 10%

Growth firm, r > K Normal firm, r = K Declining firm, r < K
g = br = 0.10 × 0.15 = 0.015 g = br = 0.10 × 0.10 = 0.01 g = br = 0.10 × 0.08 = 0.008

10 1 0.1  10 1 0.1  10  1 .1 
P  P  P 
0.10 0.015 0.10 0.01 .10 .008
9 9 9
=  ` 106 =  ` 100 =  ` 98
0.085 0.09 0.092

 The market value of the share (P) increases with the retention ratio, b, for firms with
growth opportunities i.e. r > K.
 The market value of the share, (P) increases with the payout ratio, (1 – b), for declining
firms with r < K.
 The market value of the share is not affected by dividend policy when r = K.
Gordon model's conclusions about {S>{dS>oÝS> nm°{cgr Ho$ g§X^© _| Jm°S>©Z _m°S>c Ho$ {ZîH$f©
dividend policy are similar to that of Walter's dmëQ>g© _m°S>c Ho$ g_mZ h¡Ÿ& `h g_mZVm XmoZm| _m°S>ëg Ho$
model. This similarity is due to the similarities
of assumptions which underlie, both the A§VJ©V g_mZ _mÝ`VmAm| Ho$ H$maU h¡:
models:
From Gordon's model it is revealed that: Jm°S>©Z _m°S>c go `h àH$Q> hmoVm h¡ {H$:
1. The market value of the share increases 1. J«moW Am°ßÀ`y©{ZQ>r AWm©V r > K Ho$ gmW eo`a H$s
with the retention ratio for firm's, with _mH}$Q> d¡ë`y \$_© Ho$ [aQ>oÝeZ aoemo Ho$ gmW ~‹T>Vr h¡Ÿ&
growth opportunities i.e. r > K.
2. The market value of the share increases 2. r < K Ho$ gmW {S>ŠcmBqZJ \$åg© Ho$ {cE eo`a H$s
with payout ratio. For declining firm with _mH©o$Q> d¡ë`y, no-AmCQ> aoem| Ho$ gmW ~‹T>Vr h¡Ÿ&
r < K.
3. The market value of the share is not 3. O~ r = K hmo V~ eo`a H$s _mH}$Q> d¡ë`y {S>{dS>oÝS>
affected by dividend policy, when r = K. nm°{cgr Ûmam à^m{dV Zht hmoVr h¡Ÿ&
Dividends and Uncertainty: The Bird in the {S>{dS>oÝS> Ed§ A{ZpíMVVm: X ~S>© BZ X hoÝS> Am°½`y©_oÝQ>
Hand Argument
According to Gordon's model, dividend Jm°S>©Z _m°S>c Ho$ AZwgma, {S>{dS>oÝS> nm°{cgr Aàmg§{JH$
policy is irrelevant where r = K if all other h¡ Ohm± r = K hmo `{X AÝ` g^r _mÝ`VmE| à_m{UH$ hmoŸ&
assumptions held valid. But if we observe the naÝVw `{X h_ BZ _mÝ`VmAm| H$mo dmñV{dH$Vm Ho$ gmW
assumptions more closely with reality, we Á`mXm {ZH$Q> ê$n go XoIo Vmo h_ `h {ZîH$f© {ZH$mc|Jo {H$
conclude that dividends policy affects the value
of share even where r = K. This view is based {S>{dS>oÝS> nm°{cgr r = K hmoZo na ^r eo`a H$s d¡ë`y à^m{dV
on the assumption that under conditions of H$aVr h¡Ÿ& `h Ñ{ï>H$moU Bg _mÝ`Vm na AmYm[aV h¡ {H$
uncertainty, investors discount distant A{ZpíMVVm H$s pñW{V _| BZdoñQ>g© H$aÝQ> {S>{dS>oÝS> Ho$
dividends at a higher rate than the near ~Om` â`yMa {S>{dS>oÝS> H$mo hm`a aoQ> na {S>ñH$mCÝQ> H$aVo
dividends. Investors are rational. They want h¢Ÿ& BZdoñQ>g© {ddoH$s hmoVo h¢Ÿ& do [añH$ H$mo Xya H$aZm MmhVo