Page 193 - 5.2 i. Manac Finance ITC Summarised Notes

THE DIVIDEND DECISION

Dividend decisions in an imperfect market

• The dividend policy is relevant as it directly affects the company value.

PV = . D¹ .

ke – g

• It can be seen there is a trade off between current dividends and

growth. Paying a higher dividend now will increase D¹ and the PV
(share price). However, it will reduce growth which will in turn reduce
the PV (share price).

• Therefore a balance is needed to maximise the value of the company

and keep shareholders satisfied.

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