Dividend Policy

stableness of divid lay off insurance. There whitethorn be three types of dividend policy (1)Strict or Conservative dividend form _or_ system of government which envisages the retentiveness of boodle on the apostrophize of dividend agree a bun in the oven-out. It helps in strengthening the monetary position of the summon with (2) Lenient Dividend policy which over lodge ins the requital of dividend at the maximum arrange potential taking in view the ongoing earing of the confede proportionalityn. Under much(prenominal) policy association retains the minimum possible meshwork (3)Stable Dividend Policy suggests a mid- authority of the preceding(prenominal) dickens views. Under this policy, horse barn or almost horse barn set up of dividend is maintained.Company maintains reserves in the socio-economic classs of prosperity and lend oneselfs them in pay offing dividend in lean social class. If fellowship fol pitiables permanent dividend policy, the trade wro ng of tis shargons sh every(prenominal) be higher. There ar reasons why investors favour stalls dividend policy. Main reasons argon- 1. Confidence Among Sh arholders. A regular and stable dividend payment whitethorn serve to resolve un indis clotheablety in the minds of shareholders. The attach to resorts non to cut the dividend digit rase if its loot are poorer. It maintains the footstep of dividends by appropriating the specie from its reserves.Stable dividend presents a bright future of the f consec prisernity and and then gains the confidence of the shareholders an the good al baseborn for of the social club increases in the eyes of the everyday investors. 2. Income aware Investors. The second factor favoring stable dividend policy is that some investors are income cognizant and favor a stable station of dividend. They too, never favour an dubious rte of dividend. A Stable dividend policy whitethorn as wellhead as satisfy much(prenominal) investors. 3. Stability in Market set of Shares. Other things beings peer, the grocery store toll very with the rate of dividend the participation declares on its blondness shares.The valuate of shares of a telephoner having a stable dividend policy fluctuates non widely even if the weeings of the high society turn down. Thus, this policy buffer the trade toll of the fund. 4. Encouragement to Institutional Investors. A stable dividend policy attracts enthronements from institutional investors much(prenominal) institutional investors generally prepare a list of securities, mainly incorporating the securities of the companies having stable dividend policy in which they invest their surpluses or their long term line of descents such(prenominal) as pensions or provident funds etc.In this way, stableness and method of dividends non only affects the commercialise price of shares but in like manner increases the general credit of the company that pays the company in the long run. F actors Affecting Dividend Policy A number of conside balancens affect the dividend policy of company. The major factors are 1. Stability of Earnings. The nature of business line has an important bearing on the dividend policy. Industrial units having stability of boodle may formulate a more legitimate dividend policy than those having an uneven flow of incomes because they stinkpot predict easily their savings and honorarium.Usually, trys transaction in necessities suffer less from oscillating collectings than those dealing in luxuries or fancy goods. 2. Age of familiarity. Age of the corporation counts much in deciding the dividend policy. A new-fashioned-madely established company may command much of its simoleons for expansion and plant improvement and may pack a rigid dividend policy while, on the former(a)wise hand, an older company can formulate a clear cut and more consistent policy regarding dividend. 3. Liquidity of Funds.Availability of hard currency and sou nd financial position is as well an important factor in dividend ratiocinations. A dividend represents a currency overflow, the greater the funds and the fluidness of the unswerving the better the ability to pay dividend. The liquidity of a besotted depends very much on the investment and financial ends of the firm which in turn determines the rate of expansion and the manner of backing. If cash position is weak, stock dividend allow for be appointd and if cash position is good, company can march on the cash dividend. 4. Extent of share Distribution.Nature of ownership also affects the dividend decisions. A closely held company is likely to breed the assent of the shareholders for the suspension system of dividend or for adjacent a conservative dividend policy. On the other hand, a company having a good number of shareholders widely distributed and forming low or medium income group, would face a great difficulty in securing such assent because they volition emphasis e to distribute higher dividend. 5. Needs for excess Capital. Companies retain a part of their additions for strengthening their financial position.The income may be conserved for conflux the increased requirements of working big(p) or of future expansion. Small companies usually find difficulties in raising finance for their pick ups of increased working slap-up for expansion programmes. They having no other alternative, use their ploughed back profits. Thus, such Companies distribute dividend at low rates and retain a big part of profits. 6. Trade Cycles. personal credit line cycles also exercise influence upon dividend Policy. Dividend policy is adjusted concord to the business oscillations.During the boom, prudent management creates food reserves for contingencies which follow the inflationary period. higher(prenominal) rates of dividend can be used as a cats-paw for marketing the securities in an other depressed market. The financial solvency can be proved and maintai ned by the companies in dull course of instructions if the able reserves control been built up. 7. Government Policies. The remuneration capacity of the enterprise is widely affected by the change in fiscal, industrial, labour, control and other government policies.sometimes government restricts the dissemination of dividend beyond a authorized function in a particular industry or in all spheres of business activity as was done in emergency. The dividend policy has to be modified or formulated accordingly in those enterprises. 8. Taxation Policy. spicy appraiseation reduces the earnings of he companies and consequently the rate of dividend is lowered down. Sometimes government levies dividend-tax of dispersal of dividend beyond a genuine limit. It also affects the majuscule formation. N India, dividends beyond 10 % of aid-up heavy(p) are subject to dividend tax at 7. 5 %. 9. Legal Requirements. In deciding on the dividend, the directors topic the legal requirements too into consideration. In order to protect the use ups of creditors an outsiders, the companies Act 1956 prescribes certain guidelines in respect of the distribution and payment of dividend. Moreover, a company is take to provide for depreciation on its located and tangible assets before declaring dividend on shares. It proposes that Dividend should non be distributed out of capita, in any nerve. give carewise, contractual tariff should also be fulfilled, for example, payment of dividend on preference shares in anteriority over ordinary dividend. 10. Past dividend Rates. While formulating the Dividend Policy, the directors must keep in mind the dividend paid in past years. The menses rate should be around the average past rat. If it has been abnormally increased the shares will be subjected to speculation. In a new concern, the company should consider the dividend policy of the antagonist organisation. 11. Ability to Borrow.Well established and large firms retain better acces s to the capital market than the new Companies and may borrow funds from the external sources if thither arises any take in. much(prenominal) Companies may go for a better dividend pay-out ratio. Whereas smaller firms go through to depend on their internal sources and therefore they will turn out to built up good reserves by reducing the dividend pay out ratio for meeting any obligation requiring heavy funds. 12. Policy of Control. Policy of control is a nonher(prenominal) determining factor is so farthermost as dividends are concerned.If the directors want to have control on company, they would not like to add new shareholders and therefore, declare a dividend at low rate. Because by adding new shareholders they fear dilution of control and diversion of policies and programmes of the existent management. So they prefer to meet the needs through bear earing. If the directors do not both(prenominal)er about the control of affairs they will follow a big(p) dividend policy. Thus control is an influencing factor in framing the dividend policy. 13. Repayments of Loan. A company having give indebtedness are vowed to a igh rate of retention earnings, unless one other arrangements are make for the redemption of debt on maturity. It will naturally lower down the rate of dividend. Sometimes, the lenders (mostly institutional lenders) put restrictions on the dividend distribution still such time their loan is outstanding. Formal loan contracts generally provide a certain standard of liquidity and solvency to be maintained. Management is bound to hour such restrictions and to limit the rate of dividend payout. 14. m for Payment of Dividend. When should the dividend be paid is another consideration.Payment of dividend means outflow of cash. It is, therefore, delectable to distribute dividend at a time when is least needed by the company because there are peak times as well as lean periods of expenditure. Wise management should plan the payment of dividend in such a manner that there is no cash outflow at a time when the undertaking is already in need of urgent finances. 15. Regularity and stability in Dividend Payment. Dividends should be paid on a regular reason because each investor is stakeed in the regular payment of dividend.The management should, inspite of regular payment of dividend, consider that the rate of dividend should be all the most constant. For this exercise sometimes companies maintain dividend Meaning and Types of Dividend The profits of a company when made available for the distribution among its shareholders are called dividend. The dividend may be as a fixed annual percentage of paid up capital as in the graphic symbol of preference shares or it may vary according to the prosperity of the company as in the case of ordinary shares.The decision for distributing or paying a dividend is taken in the meeting of get on with of Directors and in confirmed generally by the annual general meeting of the shareholders. T he dividend can be declared only out of divisible profits, remained subsequently setting of all the expenses, transferring the reasonable amount of profit to reserve fund and providing for depreciation and taxation for the year. It means if in any year, there is not profits, no dividend shall be distributed that year.The shareholders cannot put forward upon the company to declared the dividend. It is solely the politeness of the directors. Aunt hinted that the dividend was an income of the owners of the corporation which they received in the capacity of the owner. Distribution of dividend involves lessening of rate of flow assets (cash) but not always. Stock dividend or bonus shares is an elision to it Basic Issues Involved in Dividend Policy There are certain basic questions which are Involved in determining the sound dividend policy. Such questions are- 1.Cost of Capital. Cost of capital is one of the considerations for taking a decision whether to distribute dividend or not . As decision making tool, the Board calculates the ratio of rupee profits that the business extends to earn (Ra) to the rupee, profits that the shareholders can expect to earn outside (Rc) i. e. , Rs. /Rc. If the ratio is less than one, it is a signal to distribute dividend and if it is more than one, the distribution of dividend will be dis stay putd. 2. realisation of Objectives. The main objectives of the firm i. e. maximization of wealth for shareholders including there up-to-date rate of dividend-should also be aimed at in formulating the dividend policy. 3. Shareholders Group. Dividend policy affects the shareholders group. It means a company with low pay-out an heavy reinvestment attracts shareholders interested in capital gains rather than n accepted income whereas a company with high dividend pay-out attracts those who are interested in current income. 4. Release of Corporate earnings. Dividend distribution is taking as a mens of distributing bracing funds.Dividend pol icy affects the shareholders wealth by varying its dividend pay = out ratio. In Dividend policy, the financial manager decides whether to release Corporate earnings or not. These are certain basic issues Involved in formulating a Dividend policy. Dividend policy to a large extent affects the financial structure, the flow of funds, liquidity, stock prices and in the know shareholders satisfaction. That is why management exercises a high degree of judgment establishing a sound dividend pattern.Dividend PolicyDividend Policy Vinod Kothari Corporations earn profits they do not distribute all of it. Part of profit is ploughed back or held back as kept up(p) earnings. Part of the profit gets distributed to the shareholders. The part that is distributed is the dividend. The ratio of the actual distribution or dividend, and the total distributable profits, is called dividend payout ratio. How much of its profits should a corporation distribute? There are several considerations that apply in answering this question. Hence, companies have to frame and work on a unequivocal policy of dividend payout ratio.Of course, no corporate management can afford to disturb to a fixed dividend payout ratio year later onward year incomplete is such fixity of dividend payout ratio required or judge. However, management has to broadly decide its policy on its broad attitude towards distribution liberal dividend payout ratio, or conservative dividend payout ratio, etc. If one were to ask this question in context of debt sources of capital for example, how much interest should a corporation pay to its bankers, the answer is straight forward. As interest paid is the cost of the borrowing, the lesser the interest a corporation pays, the better it is.Besides, companies do not have choice on paying of interest to lenders as the rate of interest is contractually fixed. Rate of dividends may be fixed in case of preference shares too. However, in case of rightfulness shares, there is no fixed rate of dividends. It cannot be said that the dividend paid is the cost of legality capital if that was the case, corporations may try to minimize the dividend distribution. Hence, the following points emerge as regards the dividend distribution policy The cost of fair-mindedness is defined as the rate at which the corporation must earn on its faithfulness to keep the market price of the righteousness shares constant.Let us further suppose that the market price of the shares is obtained by capitalizing the earnings of the corporation at a certain capitalization rate the capitalization rate itself depending on the riskiness or beta of the industry. Suppose the corporation does not earn any profit. Shareholders were expecting a certain rate of harvesting on their shareholding hence, share prices will fall at the expected recurrence on fair play. On the other hand, if just the expected rate of issuing is earned by the corporation, the price of virtue shares be constant if the earnings are entirely distributed, and xactly grows by the expected rate of return if the earnings are entirely retained. The supra discussion leads to the completion that the cost of equity is not the dividends but the return on equity hence, a corporation cannot work on the objective of minimizing dividends. Equity shareholders are the owners of the corporation hence, retained earnings ultimately belong to the shareholders. Supposing a company earns return on equity of 10%, and retains the whole of it, the retained earnings increase the net asset tax (NAV) of the equity shares exactly at the rate of 10%.Assuming there are no other factors impact the equity price of the company, the market price of the shares should exactly go up by 10% commensurate with the increase in the NAV of the shares. That is to say, shareholders gain by way of appreciation in market price to the extent of 10%. On the other hand, if the company distributes the entire earnings , shareholders earn a cash return of 10%, and there is no impact on the NAV of the shares, hence, the like should remain unchanged.Therefore, in both the cases, the shareholders earned a return of 10% in the first case, by way of harvest-festival or capital appreciation, and in the second case, by way of income. In other words, scarcely because the corporation is not distributing profits does not mean it is depriving shareholders of the rate of return on equity. The above two points reflect the indifference, sometimes referred to as ir relevance of dividend policy (see Modigliani and Miller approach later in this Chapter) from the viewpoint of both the company or its shareholders. Supposing the corporation decides to retain the entire earning.Obviously, the corporation would earn on this retained profit at the applicable return on equity. discover that the return on equity is relevant, as retained earnings would be leveraged and would, therefore, benefit from the impact of lev erage too. On the other hand, if the corporation were to distribute the entire profits, shareholders reinvest/consume the income so distributed at their own rate of return. Hence, it may be contended that whether the company retains or distributes the earnings depends on whose reinvestment rate is higher that of the company or that of the shareholders?Quite clearly, the rate of reinvestment in the hand of the corporation is higher than that in the hands of the shareholders, (a) because of leverage which shareholders may not be able to garner and (b) intuitively, that is the very reason for the shareholders to invest in the company in the first place. This argument generally favors retention of profits by the company rather than distribution. As we discuss later, this argument is the basis of the Walter formula As a counter argument to this, it is contended that shareholders do not need harvest-feast only they need current income too.Many investors may sustain their livelihood on dividend earnings. Of what avail is the increase in market tax of shares, if I need cash to spend for my expenses? However, in the age of demat securities and liquid stock markets, result and income are almost equivalent. For example, if I am holding equity shares worth $ 100, which appreciate in grade to $ 110 due to retention, I can dispose off 10/110% of my shareholding, earn cash equal to $ 10, and still be left with stock worth $ 100, which is exactly the equivalent as earning cash dividend of $ 10 with no retention at all.While the above argument may point to indifference among growth and income, the frankness of the marketplace is that investors do have varying preferences for growth and income. There are investors who are growth-inclined, and there are those who are income-inclined. Majority of retail investors insist on balance between growth and income, as they do not see an exact equivalence between appreciation in market value and current cashflows. Hence, the co nclusion that emerges is that companies do have to strike a balance between shareholders need for current income, and growth opportunities by retained earnings.Hence, dividend policy still remains an important consideration. While making the above points, there are certain special points that affect particular authority that need to be borne in mind Companys reinvestment rate lower than that of shareholders Sometimes, there are companies that do not have remarkable reinvestment opportunities. More precisely, we say the reinvestment rate of the company is lesser than the reinvestment rate of shareholders. In such cases, obviously, it is better to pay earnings out than to retain them.As the unspotted theories of impact of dividends on market value of a share (see Walters formula downstairs) suggest, or what is anyway intuitively understandable, retention of earnings makes sniff out only where the reinvestment rate of the company is higher than that of shareholders. Tax disparit ies between current dividends and growth In our discussion on indifference between current dividends and share price appreciation, we have imitation that taxes do not quicken a spoilsport. In fact, quite often, they do.For example, if a company distributes dividends, the same may be taxed (either as income in the hands of shareholders, or by way of tax on distribution like dividend distribution tax in India). Alternatively, if the shareholders have a capital appreciation, which they encash by partial settlement of holdings, shareholders have a capital gain. Taxability of a capital gain may not be the same as that of dividends. Hence, taxes may differentiate between current dividends and share price appreciation. Shares with fixed returns Needless to say, there is no relevance of dividend policy where dividends are payable as per terms of issue for example, in case of preference shares. Entities requiring minimum distribution There might also be situations where entities are re quired to do a minimum distribution under regulations. For example, in case of real estate investment trusts, a certain minimum distribution is required to attain tax diaphanous status. There might be other regulations or regulatory motivations for companies to distribute their profits.These regulations may impact our discussion on relevance of dividend policy on price of equity shares. Unlisted companies Finally, one must also short letter that discussion above on the parity between distributed earnings and retained earnings the latter leading to market price appreciation will have relevance only in case of listed firms. Technically speaking, in case of unlisted firms too, retained earnings belong to the shareholders, as shareholders after all are the owners of the residual wealth of the company. However, that residual ownership may be a myth as companies do not istribute assets further in event of winding, and winding up is a rarity. The discussion in this chapter on dividen d policy, as far is relates to market price of equity shares, is guardianship in mind listed firms. In case of unlisted firms, classical models such as Walters model or Gordon Growth model discussed below may hold relevance than market price-based models. From dividends to market value of equity Dividend capitalisation approach If, for a second, we were to ignore the stock market capitalisation of a company, what is the market value of an equity share?Say, we take the case of an unlisted company. We know from our discussion on present values that the value of any asset is the value of its cashflows. What is the cashflow a shareholder gets from his equity? As long as the company is not wound up, and the shareholder does not sell the stock, the only cashflow of the shareholder is the dividends he gets. It is well-situated to understand that if we are not envisaging either a sale of the shares or a liquidation of the company, then the current of dividends may be chance upond to cont inue in perpetuity. Hence, VE = ? ? (1 + K i =1 Di E )i (1)Where VE Value of equity K E Cost of equity Di dividends in paid in year i equation (1) is easy to understand. Shareholders continue to receive dividends year after year, and these dividends are discounted by the shareholders at the cost of equity, that is, the required return of the shareholders. If the stream of dividends is constant, then Equation (1) is actually a geometric furtherance. We can bull Equation (1) either to compute the price of equity, if the constant stream of dividends is known, or to compute the cost of equity, if the dividend rate and market price of the shares is known.Applying the geographical progression formula for adding up continual progressions, assuming constant dividends equal to D, Equation (1) above becomes VE = = D (1 + K E ) ? (1 ? 1 ) 1+ KE (2) D KE Example Supposing a company the nominal value equity were $ 100, and the dividends at the rate of 10 % were $ 10, if the cost of equity is 8%, then the market price of the shares will given by 10/8%, or $ 125. Incorporating growth in dividendsIn our over-simplified example above, we have taken dividends to be constant. It would be unusual to expect that dividends will be constant, particularly where the company is not distributing all its earnings. That is to say, with the retained earnings, the company has increasing profits in nonparallel years, and therefore, it continues to distribute more. If dividends grow at a certain intensify rate, say g, then, Equation (2) above becomes VE = D (1 + g ) (1 + K E ) = ? (1 ? 1+ g ) 1+ KE (3) D (1 + g ) KE ? gNote that we have assumed here that even the first dividend will have grown at g rate, that is, the historical dividend has been D, but we are expecting the current years dividend to have increased at the constant rate. If we assume the current years dividend will not show the growth, and the growth will come from the forthcoming year, then we can remove (1+g) in the nu merator above. The formula as it stands is also referred as Gordons dividend growth formula, discussed below. Example Supposing a company the nominal value equity were $ 100, and the dividends at the rate of 10 % were historically $10.Going forward, we expect that the dividends will continue to grow at a rate of 5% per annum. If the cost of equity is 8%, what is the market value? We put the numbers in the formula and get a value of $350. Note that we can also test the valuation above on Excel. If we take sufficient number of dividends, say, 1000, successively growing at the rate of 5%, and we discount the entire stream at 8%, we will get the same value. Example Supposing a company the nominal value equity were $ 100, and the dividends at the rate of 10 % were historically $10.Going forward, we expect that the dividends will continue to grow at a rate of 12% per annum. If the cost of equity is 8%, what is the market value? This is a case where the growth in dividends is higher than t he discounting rate. The growth in dividends is a multiplier the discounting rate is a divisor. If the multiplier is higher than the divisor, then the present value of each successive dividend will be higher than the previous one, and hence a perpetual series will have infinite value. There is yet another notable point the growth rate g above may be also be visualised as the appreciation in the market value of the share.That is, shareholders are rewarded in form of current earnings as well as growth in the value of their investment. Dividend-based equity models Walter Approach The Walter formula belongs to James E Walter, and is based on a simple argument that where the reinvestment rate, that is, rate of return that the company may earn on retained earnings, is higher than cost of equity (which, as we have discussed before, the expected returns of the shareholders, or rate of return of the shareholders), then, it would be in the interest of the firm to retain the earnings.If the c ompanys reinvestment rate on retained earnings is the less than shareholders rate of return, the company should not retain earnings. If the two rates are the same, then the company should be indifferent between retaining and distributing. The Walter formula is based on a simple analysis that the market value of equity is the capitalisation of the current earnings and growth in price (g in our formula in equation 3 above). Hence, the basis of Walter formula is VE = D +g KE (4) Here, the growth factor occurs because the rate of return on retention done by the company is higher than the cost of equity.That is to say, the company continues to earn at r rate of return on the retained earnings, and this is what causes growth g. Hence, g= r (E-D)/ K E Inserting equations (5) into (4), we have VE = (5) D KE + r (E D)/K E KE (6) Where r = rate of return on retained earnings of the company E = earnings rate D = dividend rate Example Supposing a company the nominal value equity is $ 100, and the dividends at the rate of 10 % are $10. Supposing the company earns at the rate of 12% , what is the market value of equity if the the cost of equity is 8%?The market value of the share comes to $ 162. 50. This is explainable easily. As the company is earning $12, and distributing $10, it retains $ 2 every year, on which it earns at 12%. The capitalised value of 0. 24 at 8% will be the expected growth. Therefore, the sustainable earnings of the shareholders will be $ 10 +3, which, when capitalised at 8%, produces the value $ 162. 50. Of course, the find out learning from Walters approach is not what the market value of equity is, but how the market value of equity can be maximised by following a proper distribution policy.For instance, in the present case, it is not advisable for the company to distribute any dividend at all, as the company earns more than the shareholders opportunity rate. If the company was not to distribute anything, the market value of the share may increase to $ 225. Gordon growth model Gordons growth model is simply Equation (3) above, that is, VE = D (1 + g ) KE ? g This is, as we have seen above, derived from perpetual sum of a geometric progression, under the assertion that the growth rate is less than the cost of equity. Modigliani and Miller approachFranco Modigliani was awarded Nobel measure in 1985 and Merton Miller in 1990 (along with Markowitz and Sharpe). M&038M have theorised on the irrelevance of the capital structure, and a corollary, irrelevance of the dividend payout ratio to the value of the firm. Like several financial theories, M&038M hypothesis is based on the argument of efficient capital markets. In addition, we believe that a firm has two options (a) It retains earnings and finances its new investment plans with such retained earnings (b) It distributes dividends, and finances its new investment plans by issuing new shares.The intuitive background of the M&038M approach is extremely simple, and in fact, almost selfexplanatory. It is based on the following propositions Why would a company retain earnings? Only tenable reason is that the company has investment opportunities. If the company does not retain earnings, where does it finance those investment opportunities from? We may assume a debt issuance, but then as M&038M otherwise propounded irrelevance of the capital structure, they see a parity between debt and equity, and hence, it does not make a difference whether the new investments are funded by equity or debt.So, let us assume that the new growth plans are funded by equity. Shareholders price the equity shares of the company to take into account the earnings and the retentions of the company. If the company distributes dividends, the shareholders take into account that fact in pricing of the shares if the company does not distribute dividends, that is also reflected in the pricing of the shares. If dividends are distributed, the financing needs of the company will be funded by is suing new shares. The issue price of these shares will compensate for the fact that the dividends have been distributed.That is to say, the market price of the share will remain unaffected by whether the dividends have been distributed or not. Let us take a one year time horizon to understand the indifference argument of M&038M. We use the following new notations Po P1 D1 n m I X Price of the equity share at point 0 Price of the equity share at point 1, that is, end of period 1 Dividend per share being paid in period 1 existing number of issued shares new shares to be issued Investment needs of the company in year 1 Profits of the firm year in 1 The relation between the price at the beginning of the year (Po), and that at he end of the year (P1) is the simple question of discounted value at the shareholders expected rate of return (KE). Hence, Po = (P1 +D1) / (1+(KE) (7) Equation (7) is quite easy to understand. Shareholders have got a cash return equal to D1 at the end of Year 1, and the share is still worth P1. Hence, discounted at the cost of equity, the discounted value is the price at the beginning of the period. Alternatively, it may also be declared that the P1 = (P0 )* (1+(KE) D1 (8) That is to say, if the company declares dividends, the price the end of year 1 comes down to the solution of the distribution.Equation (7) can be manipulated. By multiplying both sides by n, and adding a self-cancelling number m, we may write (7) as follows nPo = (n+m)P1 -mP1 +nD1)/(1+(KE) (9) Note that we have multiplied both sides by n, and the added number m along with m is cancelled by deducting the same outside the brackets. mP1 represents the new share capital raised by the company to finance its investment needs. How much share capital would the company need to raise? Given the investment needs I and the profits X, the new capital issued will be given by the following mP1 = I (X nD1) (10)Again, this is not difficult to understand, as the total amount of profit of the company is X, and the total amount distributed as dividends is nD1. Hence, the company is left with a funding gap as shown by equation (10). If the value of mP1 is substituted in Equation (9), we have the following nPo = (n+m)P1 I (X nD1)+nD1)/(1+(KE) (11) As nD1 would cancel out, we will be left with the following nPo = (n+m)P1 I + X /(1+(KE) (12) Since nPo is total value of the stock at point 0, it is seen from Equation (12) that dividend is not a factor in that valuation at all.