Dividend

Dividend payment is an important factor for maximising shareholder wealth.  Porterfield (1965) argued the dividend add to the old share price and calculate the new share price. Modigliani and Miller (1961) stated dividend have no effect on the share price. They believe dividend payment is irrelevance and that is not affecting the share price of the company. The Modigliani and Miller argued the   share price of the company is depending on the gains from future investment.

The future investment is a share holder money, therefore companies have to invest that money should be invest in the positive NPV investment. If the investments not invest in the project that should be deliver to the shareholders through dividend.

Most of the shareholders are require dividend but if the dividend not enough on their investment then they sell off the shares and invest on that who deliver the more dividend on the investment.

The most of the companies in the 2008 and 2009, they suspended the dividend payment because of credit crunch caused by housing market collapse. In this period most of the investors accept the companies can’t pay the dividend.

In the UK, companies paying two type of dividend such as interim dividend and final dividend.  In the recent BBC news 2010 the Seven Trent profit have halved despite a rise in revenues as the water firm faced a series of charges. The company cut it interim dividend by 2.5% to 26.04P in 2010 -2011.

The seven Trent introduce the new dividend policy for the period 2011-2012 and 2014-2015 should be RPI plus 3%. Because of that, they want to good progress in many key areas including further improvement in customer services.  

Dividend payment is give an opportunity to restore the investors and share price in the stock market.

Capital Structure

Capital structure is an important for a firm. Proportion of debt in the capital structure can influence the cost of capital and wealth of the shareholders. If, as a result of increasing the gearing ratio, this lead to increase in financial distress causes the shareholders and creditors to demand more return. But the gearing ratio can’t be too low. In the traditional view, the firm have to maintain optimum balance between cost of capital and debt.

In 1958, Modigliani and Miller’s concluded that the value of the firm remains constant; it doesn’t make difference between equity and debt. They assume, it not aligns with the real financial market such as taxation, perfect capital market with perfect information available all economic agents and no transaction cost.

Increasing in debt could be effect the share price of the firm.  So it wouldn’t make a sense to the shareholder and high risk faced the company. To mitigate the risk company have to invest in lower risk debt. This is further enhanced the tax relief on debt capital. Debt to equity can also be affected by other factors such as borrowing capacity, reinvestment risk.....etc.

In the recent BBC news ( 2009) De Beers, the world’s largest diamond producer plans to raise $1bn rights issue from investors to cut debt. Because the company debt’s currently have $3.5bn, by reducing the De Beers level of debt could improving the capital structure of the company. This enables the company to take an advantage of new investment opportunities.