Finance

Definition: A Stock Split is a method of increasing the number of outstanding shares with a proportionate reduction in its face value. With a split only the price per share reduces, the market capitalization i.e. market value of the outstanding shares and the proportionate ownership interest of the existing shareholders do not change. The stock split is generally done when … [Read more...] about Stock Split

Definition: The Dividends are the proportion of revenues paid to the shareholders. The amount to be distributed among the shareholders depends on the earnings of the firm and is decided by the board of directors. Types of Dividend Cash Dividend: It is one of the most common types of dividend paid in cash. The shareholders announce the amount to be disbursed among the … [Read more...] about Types of Dividend

Definition: The Gordon's Model, given by Myron Gordon, also supports the doctrine that dividends are relevant to the share prices of a firm. Here the Dividend Capitalization Model is used to study the effects of dividend policy on a stock price of the firm. Gordon's Model assumes that the investors are risk averse i.e. not willing to take risks and prefers certain returns to … [Read more...] about Gordon’s Model

Definition: According to the Walter's Model, given by prof. James E. Walter, the dividends are relevant and have a bearing on the firm’s share prices. Also, the investment policy cannot be separated from the dividend policy since both are interlinked. Walter's Model shows the clear relationship between the return on investments or internal rate of return (r) and the cost of … [Read more...] about Walter’s Model

Definition: Miller and Modigliani Hypothesis or MM Approach supports the “dividend irrelevance theory”, stating that the dividends are irrelevant and has no effect on the firm’s share value. Also, it is believed that it is the investment policy that increases the value of the shares and hence should be given more importance than the payouts to the shareholders. To justify … [Read more...] about Proof of Miller and Modigliani Hypothesis

Definition: According to Miller and Modigliani Hypothesis or MM Approach, dividend policy has no effect on the price of the shares of the firm and believes that it is the investment policy that increases the firm’s share value. The investors are satisfied with the firm’s retained earnings as long as the returns are more than the equity capitalization rate “Ke”. What is an … [Read more...] about Miller and Modigliani theory on Dividend Policy

Definition: The Dividend Policy is a financial decision that refers to the proportion of the firm’s earnings to be paid out to the shareholders. Here, a firm decides on the portion of revenue that is to be distributed to the shareholders as dividends or to be ploughed back into the firm. The amount of earnings to be retained back within the firm depends upon the availability … [Read more...] about Dividend Policy

Definition: The Profitability Index measures the present value of returns derived from per rupee invested. It shows the relationship between the benefits and cost of the project and therefore, it is also called as, Benefit-Cost Ratio. The profitability Index helps in giving ranks to the projects on the basis of its value, the higher the value the top rank the project gets. … [Read more...] about Profitability Index

Definition: The Modified Internal Rate of Return or MIRR is a distinct improvement over the internal rate of return that assumes the cash flows generated from the project are reinvested at the firm’s cost of capital rather that at the company’s internal rate of return. The formula to calculate the Modified Internal Rate of Return is: Where, n= no. of periods Terminal … [Read more...] about Modified Internal Rate of Return

Definition: The Internal Rate of Return or IRR is a rate that makes the net present value of any project equal to zero. In other words, the interest rate that equates the present value of cash inflow with the present value of cash outflow of any project is called as Internal Rate of Return. Unlike the Net present value method where we assume that the discount rate is known, … [Read more...] about Internal Rate of Return