A company’s dividend policy is influenced by its investment opportunities and the need for funds for its future projects. Generally, companies use retained earnings to source newer projects and expansion if they are in the growth phase. So, when it comes to paying dividends, growth companies often prefer to offer capital gains instead of current dividends.Internal Financing Vs External FinancingCompanies want to have the maximum financial flexibility in meeting their long-term project funding needs. To have such a situation, companies often rely on internal financing or retained earnings. It is easy to use internal financing to get the flexibility and ... Read More

When it comes to pay dividends, companies may choose two paths. One is paying out the dividends as they are generated and the other one is paying it on a later payment cycle in the future. The latter is known as capital gains in financial terms. Now, which one is more appealing to the shareholders? It is the former without any doubt.Shareholders prefer current dividends than capital gains for a host of reasons. However, the two that make the most impact are uncertainty and portfolio diversification. Let’s discuss these two factors individually to get a better understanding of the shareholder’s ... Read More

What are Hedge Funds?Hedge funds are a type of fund that actively participate in numerous other features than just buying and selling securities.A hedge fund may take short and long positions, trade options or bonds, deal in undervalued securities, and invest in any market activity where there is an opportunity for gains.A hedge fund, therefore, is a fund that is open to all kinds of investments in the market. Its sole aim is to earn profits from the market activities in wherever form it may see fit.Strategies of Hedge FundsStrategies of hedge funds usually differ depending on the nature of ... Read More

Share buyback can be advantageous in numerous ways. Some of the advantages of buyback are as follows −Return of Surplus Cash to the ShareholdersA company that buys its shares back can offer surplus cash to its shareholders. This will increase the loyalty and confidence of the shareholders in the company. Offering more cash as dividends can also boost shareholders’ wish to own more shares which has a positive impact on the operations of the company.Increase in the Value of SharesA share buyback program reduces the number of outstanding shares in the market. This increases the value of the shares. As ... Read More

Random Walk TheoryIn a "random walk", a variable does not follow a trend and it moves at random. When we apply this theory to stock prices, it suggests that the stock prices move at random and it is impossible to predict their movement, either through fundamental or technical analysis.According to the Random Walk Theory, the stock prices of any listed company follows a random walk. The theory also assumes that movement of stock prices of two different companies are independent of each other.Randomness of Share PricesThe randomness of share prices is related to the concept of fair pricing and efficient ... Read More

Although there are some distinct advantages of issuing bonus shares, it has some of its demerits too.Bonus Shares Do Not Increase the Wealth of ShareholdersThe issuance of bonus shares does not increase the wealth of shareholders as the shareholders may assume. It only makes the distribution of wealth more widespread. The total value of the wealth of shareholders after the issue of bonus shares remains the same.Although a potential increase in share price in the market due to favorable psychological effects is imminent in most cases of the issue of bonus shares, it does not directly increase the value of ... Read More

According to Walter’s Model, dividends are relevant and have a bearing on a company's share prices. It also advocates that the investment policy is interlinked with the dividend policy and the two cannot be separated.Walter's Dividend Theory is based on some assumptions that are needed to exactly classify the theory. However, some of these assumptions make the theory too rigid.Limitations of Walter's Dividend Theory ModelHere are the limitations of Walter’s dividend theory model −No External FinancingWalter’s model considers that the dividends of a company are paid using 100% retained earnings and no external financing - equity or debt is used ... Read More

Tax Neutral InvestorsIn the share market, there are always three types of investors −The first type of investor considers dividends to be always good.The second type thinks dividends are always bad.And the third type does not have any opinion about dividends.The high-payout investors prefer the first option because they can save taxes by opting for current dividends. The low-payout groups may like the second group, while a third group of tax neutral investors have no preferences because they don’t have to pay any tax on their investments.The third group of investors are actually tax neutral in nature. Since the applied ... Read More

What is Bird-in-the-Hand Theory?The bird-in-the-hand argument of dividend means that the near-future dividends are worth more than a distant-future dividend of equal amount. It considers that investors are always risk averse and so, they will discount distant future gains (capital gains) more heavily than the near future ones. That is, if an investor is asked whether he prefers one bird in the hand or two in the bush, he will always select the former.In other words, there are risks associated with dividends that are payable after a longer tenure than the ones that are paid in the near future. Investors ... Read More

Miller and Modigliani’s dividend irrelevance model is one of the most used principles of dividend valuation. It states that a firm’s dividend payout is not relevant to the valuation of a firm. The value of a firm will remain the same even when the dividends are paid or held by the company for an infinite number of years.Miller and Modigliani suggested that in a perfect share market, the dividend policy is irrelevant. They proposed that the dividend policy of a company has no effect on the stock price of a company or the company’s valuations.There are mainly two hypotheses that ... Read More