Growth In A Firm Essay

Growth in the firm can be defined in many type of meanings. For example, it can be means that an increase in the sales of company and acquire or merge with other company to expand its business. The increases in the number of staffs in the firm also one of the meanings of growth in the firm. The growth of sales can be measure as the following formula by Current year sales minus previous year sales and divided by previous year sales.

Change in demand of product or service of the company will influence the changes the sales of that company, and demand is the predictor of growth (Vijayakumar & Devi, 2011). On the other hand, the growth of company also can be measure by the increase in total assets and also the expansion of branches of the organization.

This is discussed in more details and it is mainly based on the argument called ‘Bird in the hand’. Graham and Dodd (1934) also argued that “the sole purpose for the existence of the corporation is to pay dividends”. Furthermore, a firm that pay higher dividend must sell their shares at higher prices (Frankfurter W., 2002). However, after 1960’s, M&M demonstrated that the dividend policy would be irrelevance under the assumptions of perfect capital markets. In perfect capital market, the prices of the firm’s stock and the cost of capital will not be influenced by the dividend policy as well as shareholders wealth. This could lead to dividend and capital gain are being ignored because the shareholder wealth is affected by the earnings by the firm, but not by how the income being distributed. Therefore, dividend is irrelevance in M&M

They stated that the investors will measure future earnings of the firm in choosing which company to invest but not based on dividend paid by the firm to shareholders. M&M further suggest that, to an investor, since the investors can adjust their portfolios to matches their preferences and can create “homemade” dividends, all dividend policies are effectively the same to them.

In a nutshell, the assumptions of a perfect capital market is necessary for the dividend irrelevancy hypothesis in M&M argument. There is no differences between taxes on dividends and capital gains, securities are traded with no transaction and flotation costs incurred, all market participants can access to the same information, all participants in the market are price takers and no conflicts of interests between managers and security holders, which mean no agency