Dividends Policy of Vodafone Assignment Example | Topics and Well Written Essays - 500 words

Dividends Policy of Vodafone - Assignment Example In addition, Dr. David Grundy aimed at introducing the main issues surrounding dividends, understanding the main concepts of dividend irrelevance and also evaluating the criticisms of M&M proposals. Corporate managers always consider the choice of dividend policy. They believe that firm value and the shareholders wealth may remain affected by decisions made on dividend policies (Baker 2009). Dividend policy is indispensable to investors because it supplies cash to firms with anticipation of eventually receiving money in return. An argument before Miller and Modigliani says that dividends are preferable to capital gains because of future gain uncertainty. Thus investors would rather have the money now than leave it tied up in uncertain investment. However, Miller and Modigliani concluded by saying that dividends are irrelevant in determining the firm value but most of the managers act as if their dividend policy is relevant (Baker, 2009). In spite of dividend policy decisions being concluded to be irrelevant, they play a big role in achieving firm value maximization. It’s true that dividends affect the value of firm shares. Nevertheless, investors prefer dividends since the dividend policy influence the MV of the company. For example, if the company pays low dividends, most probably the investors will sell those shares and buy in a company that will pay more dividends. Thus the share price would go down for the company that did not pay dividends. In short, high dividends may indicate a lack of attractive investments, and thus lower future investments returns. Likewise low dividends may indicate many attractive investments and thus better future prospects. Although market tends to be short-sighted. However, certain investors have preferences based on their income tax position. Income tax is at 10 percent, 23 percent and 40 percent while capital gains are taxed at 35 percent. This leads investors at a