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254 Corporate Finance BRILLIANT’S

(c) D/P ratio 30 Retention ratio = 70 ` 20 (1 0.7)
P  ` 62.50
br = 0.7 × 0.12 = 0.084 0.18 0.084

(d) D/P ratio 40 Retention ratio = 60 ` 20(1 0.6)
P  ` 81.63
br = 0.6 × 0.12 = 0.72 0.17 0.072

(e) D/P ratio 50 Retention ratio = 50 ` 20 (1 0.5)
P  ` 100
br = 0.5 × 0.12 = 0.60 0.16 0.060

(f) D/P ratio 60 Retention ratio = 40 ` 20(1 0.4)
P  ` 117.65
br = 0.4 × 0.12 = 0.048 0.15 0.048

(g) D/P ratio 70 Retention ratio = 30 ` 20(1 0.3)
P   ` 134.62

br = 0.3 × 0.12 = 0.036 0.14 0.036
Thus, Gordon’s model reflects that the Bg àH$ma, Jm°S>©Z _m°S>c `h àX{e©V H$aVm h¡ {H$
dividend decision affects market value of share {S>{dS>oÝS> {S>grOZ eo`a H$s _mH}$Q> d¡ë`y H$mo à^m{dV H$aVm
and if the payout ratio is increased, the market h¡ `{X no AmCQ> aoemo ~‹T>Vm h¡ Vmo eo`a H$s _mH}$Q> àmBg ^r
price of share will also increase.
~‹T>oJrŸ&

Dividend Irrelevance {S>{dS>oÝS> H$s Aàmg§{JH$Vm

Modigliani and Miller's Hypothesis _mo{X½cm°Zr EÊS> {_ca hm`nmo{W{gg
The most comprehensive argument in {S>{dS>oÝS> H$s Aàmg§{JH$Vm Ho$ g_W©Z _| EH$ AË`{YH$
support of the irrelevance of dividend is ì`mnH$ VH©$ MM hm`nmo{W[gg Ûmam àXmZ {H$`m J`mŸ&
provided by the MM hypothesis. According to _mo{X½cm°Zr EÝS> {_ca Ho$ AZwgma, {S>{dS>oÝS> nm°{cgr
Modigliani and Miller, dividend policy is
irrelevant as it does not affect the wealth of the Aàmg§{JH$ h¡ Š`m|{H$ `h eo`ahmoëS>g© H$s d¡ëW H$mo à^m{dV
shareholder. They argue that the value of the Zht H$aVr h¡Ÿ& CÝhmo|Zo VH©$ àñVwV {H$`m {H$ \$_© H$s d¡ë`y
firm depends on firm's earning which results CgH$s BZdoñQ>_oÝQ> nm°{cgr Ûmam A{O©V Am` na {Z^©a
from its investment policy. Thus, when H$aVr h¡Ÿ& AV:, O~ \$_© H$m BZdoñQ>_oÝQ> {S>grOZ {X`m
investment decision of the firm is given,
dividend decision is of no significance in J`m hmo V~ \$_© H$s d¡ë`y kmV H$aZo _| {S>{dS>oÝS> {S>grOZ
determining value of the firm. H$m H$moB© _hËd Zht hmoVmŸ&
Assumptions >_mÝ`VmE§
(i) The capital market is perfect. Investors (i) H¡${nQ>c _mH}$Q> na\o$ŠQ> hmoVm h¡Ÿ& BZdoñQ>g© {ddoH$nyU©
behave rationally. Information is freely VarHo$ go ì`dhma H$aVo h¢Ÿ& g^r H$mo OmZH$m[a`m± AmgmZr
available to all. Perfect capital market also go CncãY hmoVr h¡Ÿ& na\o$ŠQ> H¡${nQ>c _mH}$Q> `h ^r
implies that no investor is large enough to Xem©Vm h¡ {H$ H$moB© ^r BZdoñQ>a EH$ eo`a H$s _mH}$Q>
affect the market price of a share. d¡ë`y H$mo à^m{dV H$aZo _| nyU© ê$n go n`m©á Zht hmoVmŸ&
(ii) There is no tax or there is no difference in (ii) `hm± H$moB© Q>oŠg Zht hmoVm `m {S>{dS>oÝS> Am¡a H¡${nQ>c
the tax rates applicable to capital gain and JoZ na cmJy Q>¡Šg H$s aoQ²>g _| H$moB© AÝVa Zht hmoVmŸ&