Business finance - The Dividend Decision - Essay Example

Because, they are the ultimate owners of the company, and have to suffer even if both profits/losses made by the company. The dividend policy, its growth and valuation of shares are closely related with the company’s earning capacity. Dividend Discount Model (DDM) is one of the important tool or technique used to analyze the equity share valuation. So, dividend is an important tool to maximize the growth of cash flows and earning capacity of shareholders. The share capital of Carnock plc. is 1.

5 million ordinary shares(i.e.15,00,000shares) with a nominal value of 100p., so the overall equity capital of £150000000. The ultimate market value of shares is 225p / share, and the Finance Director of the Carnock plc decided to provide yield to the share holders at 12.5%. One of the main objectives of the finance manager is to maximize both the return on ordinary shares and total wealth of the company. Earnings Per Share (EPS) means the earnings made by a company during a particular accounting period on each of its ordinary or equity shares.

It is computed by dividing the Net Profit after interest, tax and preference dividend by number of equity shares. Number of Equity shares= Equity Financing/Market price per share. Here, market price per share amounts to 225p/share The concept EPS and theoretical ex right per share is closely related to each other. For this calculation of Right Shares or right issue is also required. “The dividend valuation model states that the market value of a security is equal to the present value of