Dividend Policy Under Uncertainty
Gordon revised his basic model to introduce risk and uncertainty. The revision is based on the logic, as time uncertainty. The revision is based on the logic, as time span increases, risk and uncertainty increases. Thus dividend policy does affect the value of the share even when r = k. The investors give ore preference to the near dividend than distant dividends in future. This argument was put forward, first of all, by Krishman. He stated “of the two stocks with identical earnings. records and prospects, but the one paying larger dividend than the other the former will undoubtedly command a higher price merely because stock holders prefer present to future values…… stockholders often act upon the principle that a that a bird in hand is worth two in the bush and for his reason are willing to pay premium for the stock with higher dividend rate, first as they discount the one with a lower rate’’3
Graham and Dodd also had the similar opinion, they expressed “Given two companies in the same general position and with the same earning power, the one paying the larger dividend will always sell at a higher price.”
Gordon revised his model under risk and uncertaining. Gordon stated that discount rates applied to dividends would increase with time.
Under risk and uncertainty. the investors prefers to avoid uncertainty and would be willing to pay higher price for the share that pays the greater dividend, keeping all other variables constant. Thus the discount rate should increase with time and distant dividends should be discounted at a higher rate i.e., kt < Kt-1 Gordon’s revised model is.
P0 = D1/(1+K1) + D2/(1+K2) + D3/(1+K3) + ………. D/(1+K11)
= ∑at=1 D/(1+K1t)
In this equation K1 < K2 …………………… Kt-1 < K1 Gordon concludes that dividend policy influence the market price of the share. This revised model justifies the behaviour of investors whose value a current rupee of dividend income more than a distant rupee of dividend income more than a distant rupee of capital gain. These investors prefer dividend above capital gains because dividends are easier to predict, less uncertain and less risky and are therefore. Discounted with a lower discount rate.