Every company should require to pay dividend out of the earnings. “ Companies using the residual dividend policy choose to rely on internally generated equity to finance any new projects. As a result, dividend payments can come out of the residual or leftover equity only after all project capital requirements are met. These company's usually attempt to maintain balance in their debt/equity ratios before making any dividend distributions, which demonstrates that such a company decides upon dividends only if there is enough money left over after all operating and expansion expenses are met. ” (How and Why Do Companies Pay Dividends?
2003). The major benefits of applying dividend valuation method are to maximize the overall profitability and dividend growth. The dividend-paying companies are mostly of less fluctuate in nature. The investors are giving high focus on their returns. Moreover, by using the discounted valuation model, stress should also give to cost of equity. In addition to this, this technique should evaluate and improves the ROE and EPS of a firm. Moreover, this concept is also giving stress for perpetuity model or OPT (Option Pricing Theory).
As a result of this concept, it is possible to maximize the Gross profits of the company. So, consequently, it is possible to increase the overall profit of the entity. It is usually derived by way of deducting the cost of goods sold or all related direct expenditure from the total sales attained by the company. Generally, it is depicted as- Sales_ Cost of Goods sold= Gross Profit. Therefore, it is possible to attain a maximum effort towards the profit margin. In addition to this, it is possible to measure the profitability of a firm with the help of gross profit.
So, gross profit is the difference between sales and cost of sales (i. e. Opening stock + purchases_ closing stock). The dividend valuation model having its own limitations like any other methods. Mainly, it very difficult to make an evaluation of the fixed income bearing securities.
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