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BRILLIANT’S Dividend Decision 255

dividend. This means that investors value BgH$m AW© h¡ {H$ BZdoñQ>g© {S>{dS>oÝS> Ho$ EH$ ê$n`o H$mo
a rupee of dividend as much as a rupee of H¡${nQ>c JoZ Ho$ EH$ én`o Ho$ g_mZ _hËd Xo|JoŸ&
capital gain.
(iii)The firm has a fixed investment policy. (iii)\$_© H$s {\$ŠñS> BZdoñQ>_oÝQ> nm°{cgr hmoVr h¡Ÿ&
(iv)Investors are able to forecast future prices (iv)BZdoñQ>g©, {ZpíMVVm Ho$ gmW â`yMa àmBgog Ed§
and dividends with certainty. {S>{dS>oÝS²>g H$m nydm©Zw_mZ cJmZo _| g_W© hmoVo h¢Ÿ&

MM Hypothesis- Base of the Argument MM hm`nmo[W{gg- VH©$ H$m AmYma
MM Hypothesis is based on arbitrary MM hm`nmo{W{gg {ddoH$nyU© VH©$ na AmYm[aV h¡Ÿ&
argument. It involves a switching and balanc- Bg_| pñdqMJ Ed§ ~ocopÝg¨J Am°naoeÝg gpå_{cV h¡Ÿ& AÝ`
ing operation. In other words, the two trans-
eãXm| _|, {S>{dS>oÝS> H$m ^wJVmZ Ed§ BÝdoñQ>_oÝQ> àmoJ«måg H$mo
actions which exactly balance or completely \$m`ZoÝg H$aZo Ho$ {cE `m Vmo Z`o eo`g© goc H$aHo$ `m
offset each other are - paying out dividends
and raising external funds – either through the E{S>eZc cmoÝg Ûmam EŠgQ>Z©c \$ÊS²>g àmá H$aZm do Xmo
Q´>mÝgoŠeÝg h¡ Omo gQ>rH$ ê$n go ~¡coÝg hmoVo h¢ `m EH$-
sale of new shares or raising additional loans–
to finance investment programmes. Suppose, Xygao Ho$ gmW nyU© ê$n go Am°\$goQ> hmoVo h¢Ÿ& _mZ br{OE {H$
a firm has some investment opportunities, it EH$ \$_© Ho$ nmg Hw$N> BZdoñQ>_oÝQ> Am°ßÀ`y©{ZQ>rO h¡ Ed§
has two alternatives: CgHo$ nmg Xmo {dH$ën h¡:
(i) It can retain its earning to finance the (i) BZdoñQ>_oÝQ> àmoJ«m_ H$mo \$m`ZoÝg H$aZo Ho$ {cE dh
investment programme; or AnZr A{Zª½g gwa{jV aI gH$Vr h¡; `m
(ii) Distribute the earnings to the shareholders (ii) A{Zª½g H$mo eo`ahmoëS>g© _| {S>{dS>oÝS> Ho$ ê$n _|
as dividend and raise an equal amount {S>ñQ´>rã`yQ> H$ao Ed§ g_mZ am{e ~mha go Z`o eo`g©
externally through the sale of new shares H$s goc Ûmam àmá H$aoŸ&
for the purpose.
If the firm selects the second alternative, `{X \$_© Xygao {dH$ën H$m M`Z H$aVr h¡ Vmo {S>{dS>oÝS>
the payment of dividend is associated with H$m ^wJVmZ, \$m`ZopÝg¨J Ho$ AÝ` _mÜ`_m| Ûmam àmá \$ÊS²>g
raising funds through other means of financ- Ho$ gmW gå~Õ hmoJmŸ& eo`ahmoëS>g© H$s d¡ëW na {S>{dS>oÝS>
ing. The effect of dividend payment on share-
holder’s wealth will exactly offset by raising no_oÝQ> H$m à^md, E{S>eZc eo`a H¡${nQ>c àmá H$aZo Ho$
additional share capital. à^md Ûmam gw{ZpíMV ê$n go à{V g§Vw{cV hmo OmEJmŸ&
When dividends are paid to the share- O~ eo`ahmoëS>g© H$mo {S>{dS>oÝS²>g H$m ^wJVmZ {H$`m
holders, the market price of the share will in- OmVm h¡ V~ eo`a H$s _mH}$Q> àmBO ~‹T>Vr h¡Ÿ& naÝVw
crease. But the issue of additional block of shares
eo`g© Ho$ E{S>eZc ãcm°H$ H$m Bí`y eo`a H$s d¡ë`y KQ>m
will decline the value of the shares. What is
XoVm h¡Ÿ& {S>{dS>oÝS> _| d¥{Õ Ho$ n[aUm_ñdê$n BZdoñQ>g©
gained by the investors as a result of increased
dividend will be neutralized completely by Š`m cm^ CR>mE|Jo `h eo`a H$s Q>{_©Zc d¡ë`y _| H$_r go
the reduction in the terminal value of the nyU©V: àmá hmo OmEJmŸ& {S>{dS>oÝS> Ho$ ^wJVmZ Ho$ nyd© Ed§
shares. The market price before and after pay-
níMmV _mH}$Q> àmBO g_ê$n hmoJrŸ& MM Ho$ AZwgma,
ment of dividend will be identical. According
to MM, the investors would be indifferent be- BZdoñQ>g© {S>{dS>oÝS> Ed§ A{Zª½g Ho$ [aQ>oÝeZ Ho$ _Ü`
tween dividends and retention of earnings. VQ>ñW hm|JoŸ& My§{H$ eo`ahmoëS>g© VQ>ñW hmoVo h¢ Bg{cE