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Dividend policy plays a significant role in determining the market value of equity shares because dividends represent the return received by shareholders from their investment. A company earns profits and may either distribute a portion of these profits to shareholders as dividends or retain them for financing future growth. The decision regarding the proportion of profits to be distributed and retained is known as dividend policy. Dividend-based share valuation attempts to determine the intrinsic or theoretical value of an equity share on the basis of the present value of expected future dividends. The underlying assumption is that the value of a share is related to the cash flows that shareholders expect to receive from owning it. The dividend-based approach is based on the principle that an investor purchases an equity share because of the expected returns in the form of dividends and capital appreciation. Since future dividends are uncertain and are received over different periods, they are discounted to their present value using an appropriate required rate of return. Thus, the value of an equity share can generally be expressed as the present value of all expected future dividends. The basic dividend valuation model can be represented as: P₀ = D₁/(1 + Ke) + D₂/(1 + Ke)² + D₃/(1 + Ke)³ + … + Dₙ/(1 + Ke)ⁿ Where P₀ represents the current value of the share, D₁, D₂, etc. represent expected dividends in different periods, and Ke represents the required rate of return or _______ ________ _______ ___ ___ __________ _________ _____ ____ ________ ___ _____.
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