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258 Corporate Finance BRILLIANT’S

(ii) If the dividend is declared:

1 6  P 1
100 = × 6 + P 1   100 
1+ 0.10 1. 10
 110 = 6 + p  P = 110 – 6
1 1
 P = ` 104
1
(iii) Price of Equity Share would be ` 104, if the dividend is paid. Hence, number of shares
to be issued:

I  E  nD 1  20, 00, 000  10, 00, 000 6, 00, 000 
 n  =
P 104
1
16 00 000, ,
,
n   15 385 shares to be issued.
104
Note: Dividend paid 1,00,000 shares at ` 6 per share = ` 6,00,000.
MM Hypothesis: A Critique MM hm`nmo[W{gg: EH$ g_rjm
MM Hypothesis argues that the dividend MM hm`nmo{W{gg Zo VH©$ àñVwV {H$`m {H$ \$_© H$s
decision of the firm is irrelevant in the sense d¡ë`y ñdV§Ì hmoVr h¡, Ho$ VmËn`© _| \$_© Ho$ {S>{dS>oÝS> {S>grOZ
that the value of the firm is independent of it.
Aàmg§{JH$ hmoVo h¢Ÿ& BZdoñQ>g© {S>{dS>oÝS> Ed§ A{Zª½g Ho$
The investors are indifferent between dividend [aQ>oÝeZ Ho$ _Ü` VQ>ñW hmoVo h¢Ÿ& Eogm _w»`V: BÝQ>aZc
and retention of earnings. This is mainly
because of the balancing nature of internal \$m`ZopÝg¨J ([aQ>oÝS> A{Zª½g) Ed§ EŠgQ>aZc \$m`ZopÝg¨J
financing (retained earning) and external (~mha go \$ÊS> àmá H$aZm) Ho$ ~¡copÝg¨J ZoMa Ho$ H$maU
financing (raising the funds externally). hmoVm h¡Ÿ& Š`m MM hm`nmo{W{gg {S>{dS>oÝS> {S>grOZ Ed§
Whether the MM hypothesis provides a d¡ë`yEeZ Ho$ ~rM Ï`moao{Q>H$c [acoeZ{en Ho$ {cE EH$
satisfactory framework for the theoretical g§VmofOZH$ T>m§Mm àXmZ H$aVr h¡? `h Bg àH$ma {Z^©a
relationship between dividend decision and
valuation will depend on whether external and H$aVm h¡ {H$ BÝQ>aZc Ed§ EŠgQ>aZc \$m`ZopÝg¨J dmñVd
internal financing really balance each other. _o| EH$-Xygao H$mo ~¡coÝg H$aVr h¡ `m ZhtŸ& `o {ZîH$f©
These conclusions are based on unrealistic AdmñV{dH$ _mÝ`VmAm| na AmYm[aV h¡Ÿ& {OgHo$ n{aUm_ñdê$n
assumptions. As a result, the conclusion that `h {ZîH$f© {ZH$mcm J`m {H$ {S>{dS>oÝS> no_oÝQ²>g Ed§ \$m`ZopÝg¨J
dividend payments and other methods of
H$s AÝ` _oWS> XmoZm| EH$-Xygao H$mo nyU©V: à{V g§Vw{cV
financing exactly offset each other and hence
H$aVo h¢ Ed§ Bg{cE {S>{dS>oÝS> H$s Aàmg§{JH$Vm EH$ àopŠQ>H$c
the irrelevance of dividend is not a practical
proposition. The validity of the MM approach àm°nmo{OeZ Zht h¡Ÿ& MM Ñ{ï>H$moU H$s d¡YVm Xmo ‘m¶Zo
is open to question on two counts: aIZo Ho$ {bE Iwbm h¡…
(a) Imperfection of capital market. (a) H¡${nQ>c _mH}$Q> H$m Båna\o$ŠeZ&
(b) Resolution of uncertainty. (b) A{ZpíMVVm H$m àñVmdŸ&
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