Dividend Policy

Stability of divid rest constitution. There whitethorn be three types of dividend policy (1)Strict or Conservative dividend Policy which envisages the belongings of wampum on the address of dividend pay-out. It helps in streng and thening the pecuniary position of the compevery (2) Lenient Dividend Policy which views the requital of dividend at the maximum grade possible victorious in view the electric current earing of the gild. Under much(prenominal) policy federation retains the minimum possible recompense (3)Stable Dividend Policy suggests a mid-way of the above devil views. Under this policy, stable or almost stable prescribe of dividend is maintained.Company maintains reserves in the familys of prosperity and uses them in pay dividend in lean stratum. If order observes stable dividend policy, the market place hurt of tis sh ars shall be higher(prenominal). There atomic number 18 reasons why investors prefer stable dividend policy. Main reasons be- 1. Co nfidence Among Shargon deporters. A regular and stable dividend retribution may serve to resolve uncertainty in the minds of portion outholders. The company resorts non to cut the dividend rate in time if its profits are lower. It maintains the rate of dividends by appropriating the funds from its reserves.Stable dividend presents a bright future of the company and thus gains the confidence of the shell outholders an the good leave alone of the company increases in the look of the general investors. 2. Income Conscious Investors. The second factor favoring stable dividend policy is that some investors are income conscious and favor a stable rate of dividend. They too, never privilege an unstable rte of dividend. A Stable dividend policy may also satisfy such investors. 3. Stability in Market Price of Shares. Other things beings equal, the market expenditure very with the rate of dividend the company declares on its legality shares.The set of shares of a company having a st able dividend policy fluctuates non widely even if the profits of the company turn down. Thus, this policy buffer the market expense of the root. 4. Encouragement to Institutional Investors. A stable dividend policy attracts investment fundss from institutional investors such institutional investors mainly 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 funds such as pensions or provident funds etc.In this way, stability and regularity of dividends non only affects the market price of shares but also increases the general credit of the company that pays the company in the long run. Factors Affecting Dividend Policy A number of conside rations affect the dividend policy of company. The major factors are 1. Stability of Earnings. The nature of business has an important bearing on the dividend policy. Industrial units having stability of sack upings may formul ate a more consistent dividend policy than those having an uneven flow of incomes because they can predict easily their nest egg and net income.Usually, enterprises dealing in necessities suffer less from oscillating throwings than those dealing in luxuries or fancy goods. 2. Age of plenty. Age of the corporation counts much in deciding the dividend policy. A unsandedly established company may require much of its earnings for expansion and plant improvement and may adopt a rigid dividend policy while, on the new(prenominal) hand, an older company can formulate a clear cut and more consistent policy regarding dividend. 3. liquidness of Funds.Availability of cash and sound financial position is also an important factor in dividend purposes. A dividend represents a cash outflow, the greater the funds and the liquidity of the riotous the better the ability to pay dividend. The liquidity of a firm work outs very much on the investment and financial decisions of the firm which i n turn determines the rate of expansion and the manner of funding. If cash position is weak, stock dividend will be distributed and if cash position is good, company can distribute the cash dividend. 4. Extent of share Distribution.Nature of ownership also affects the dividend decisions. A closely held company is likely to get the assent of the shareholders for the suspension of dividend or for following a conservative dividend policy. On the separate 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 will emphasise to distribute higher dividend. 5. Needs for Additional Capital. Companies retain a part of their profits for strengthening their financial position.The income may be conserved for clashing the change magnitude requirements of working capital or of future expansion. Small companies usually find difficulties in raising finance for their invol ves of increased working capital for expansion programmes. They having no other alternative, use their ploughed back profits. Thus, such Companies distribute dividend at low evaluate and retain a big part of profits. 6. Trade Cycles. Business cycles also exercise influence upon dividend Policy. Dividend policy is adjusted according to the business oscillations.During the boom, prudent wariness creates food reserves for contingencies which follow the inflationary period. Higher rates of dividend can be used as a tool for marketing the securities in an otherwise depressed market. The financial solvency can be proved and maintained by the companies in dull years if the adequate reserves arrive at been built up. 7. Government Policies. The earnings power 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 certain parcel in a particular indust ry or in all spheres of business activity as was d unity in emergency. The dividend policy has to be modified or formulated accordingly in those enterprises. 8. Taxation Policy. High taxation reduces the earnings of he companies and consequently the rate of dividend is lowered down. Sometimes government levies dividend-tax of distribution of dividend beyond a certain limit. It also affects the capital formation. N India, dividends beyond 10 % of aid-up capital are subject to dividend tax at 7. 5 %. 9. legal Requirements. In deciding on the dividend, the directors take the legal requirements too into consideration. In order to protect the entertains of creditors an outsiders, the companies Act 1956 prescribes certain guidelines in respect of the distribution and payment of dividend. to a greater extentover, a company is required to provide for depreciation on its fixed and tangible assets before declaring dividend on shares. It proposes that Dividend should not be distributed out of capita, in any parapraxis. alikewise, contr authentic obligation should also be fulfilled, for example, payment of dividend on preference shares in priority over ordinary dividend. 10. Past dividend Rates. While formulating the Dividend Policy, the directors must(prenominal) find in mind the dividend paid in past years. The current 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 rival organisation. 11. Ability to Borrow.Well established and large firms keep up better access to the capital market than the new Companies and may borrow funds from the external sources if there arises any motivating. Such Companies may birth a better dividend pay-out ratio. Whereas smaller firms provoke to depend on their internal sources and therefore they will have 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 another determining factor is so far 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 delight of policies and programmes of the existing watchfulness. So they prefer to meet the needs through retained earing. If the directors do not bother about the control of affairs they will follow a liberal dividend policy. Thus control is an influencing factor in framing the dividend policy. 13. Repayments of Loan. A company having loan 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 mostly provide a certain standard of liquidity and solvency to be maintained. Management is adjoin to hour such restrictions and to limit the rate of dividend payout. 14. Time for Payment of Dividend. When should the dividend be paid is another consideration.Payment of dividend means outflow of cash. It is, therefore, desirable 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 regularly because each investor is interested 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 purpose 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 slickness 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 Board of Directors and in confirmed generally by the annual general meeting of the shareholders. The dividend can be state only out of divisible profits, remained after 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 insist upon the company to declared the dividend. It is solely the discretion of the directors. Aunt hinte d 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 reduction of current assets (cash) but not always. Stock dividend or bonus shares is an turn oution 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 expects 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 fall outd. 2. realisation of Objectives. The main objectives of the firm i. e. maximization of wealthiness for sha reholders including there current 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 current 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 unused funds.Dividend policy 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 last shareholders satisfaction. That is why management exercises a high degree of judgment esta blishing 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 retained 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 native 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 definitive policy of dividend payout ratio.Of course, no corporate management can afford to stick to a fixed dividend payout ratio year after year neither is such fixity of dividend payout ratio required or anticipate. However, management has to wide-eyedly 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 right shares, there is no fixed rate of dividends. It cannot be said that the dividend paid is the cost of loveliness capital if that was the case, corporations may try to minimize the dividend distribution. Hence, the following localises emerge as regards the dividend distribution policy The cost of fair play is defined as the rate at which the corporation must earn on its rectitude to keep the market price of the equity 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 bring forth on their shareholding hence, share prices will fall at the expected return on equity. On the other hand, if just the expected rate of return is earned by the corporation, the price of equity shares remains constant if the earnings are undefiledly distributed, and xactly ascends by the expected rate of return if the earnings are entirely retained. The above discussion leads to the conclusion 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 judge (NAV) of the equity shares exactly at the rate of 10%.Assuming there are no other factors affecting the equity price of the company, the market price of the shares should exactly go up by 10% proportionate with the increase in the NAV of the shares. That is to say, shareholders gain by way of esteem 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 same should remain unchanged.Therefore, in both the cases, the shareholders earned a return of 10% in the first case, by way of growth or capital appreciation, and in the second case, by way of income. In other words, merely 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 indiff erence, sometimes referred to as irrelevancy of dividend policy (see Modigliani and Miller coming later in this Chapter) from the viewpoint of either 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. Note that the return on equity is relevant, as retained earnings would be leveraged and would, therefore, pull ahead from the impact of leverage 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 growth only they need current income too.Many investors may sustain their livelihood on dividend earnings. Of what avail is the increase in market repute of shares, if I need cash to spend for my expenses? However, in the age of demat securities and liquid stock markets, growth and income are almost equivalent. For example, if I am holding equity shares worth $ 100, which jimmy in value 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 same as earning cash dividend of $ 10 with no retenti on at all.While the above argument may point to indifference between growth and income, the reality 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 conclusion 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 detail that need to be borne in mind Companys reinvestment rate lower than that of shareholders Sometimes, there are companies that do not have significant reinvestment opportunities. More precisely, we say the reinves tment 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 classic theories of impact of dividends on market value of a share (see Walters formula below) suggest, or what is anyway intuitively understandable, retention of earnings makes sense only where the reinvestment rate of the company is higher than that of shareholders. Tax disparities between current dividends and growth In our discussion on indifference between current dividends and share price appreciation, we have fabricated that taxes do not play 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 village of holdings, shareholders have a ca pital 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 required 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 transparent 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 note 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 except in event of winding, and winding up is a rarity. The discussion in this chapter on dividend policy, as far is relates to market price of equity shares, is keeping 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 as set 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 painless to understand that if we are not envisaging either a sale of the shares or a liquidation of the company, then the stream of dividends may be assumed to continue 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 progression. We can manipulate 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 perpetual 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 successive years, and therefore, it continues to distribute more. If dividends grow at a certain compounded 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 numerator 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 rat e 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 the 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 portrayed 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 companys 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 th an 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 key 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 good 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 assumption that the growth rate is less than the cost of equity. Modigliani and Miller approachFranco Modigliani was awarded Nobel prize in 1985 and Merton Miller in 1990 (along with Markowitz and Sharpe). M&M 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 the ories, M&M 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 dry land of the M&M approach is extremely simple, and in fact, almost selfexplanatory. It is based on the following propositions Why would a company retain earnings? single 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&M 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 t he equity shares of the company to take into musical score 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 issuing 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 persuasion to understand the indifference argument of M&M. 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 Invest ment 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 stated 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 effect of the distribution.Equation (7) can be manipulated. By multiplying both sides by n, and adding a self-cancelling number m, we may hold open (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 w ith 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.