 So, far as the perfect capital market under M&M settings is concerned, the firm's choice of giving shareholders a cash dividend or a repurchase of shares from these shareholders has no matter for the overall value of the firm. To understand this, let's take an example, we have an all equity firm that has outstanding shares of 10 million, the firm has excess cash of 20 million, the firm expects to have annual free cash flows to the tune of 48 million, the firm's unlivered cost of capital is 12%. Now, we can determine the enterprise value of the firm by discounting its future free cash flows over its unlivered cost of capital and that is 400 million. By adding excess cash flows of 20 million to this 400 million, the overall enterprise value of the firm comes to 420 million. Now there are three options with the firm's board of directors to pay out this extra amount of 20 million dollars to the shareholders as dividend. These options are cash dividend, shares repurchase and issuance of new equity shares. Let's take the first example where the firm can pay dividend in the form of cash to the shareholders. We see that the per share dividend is at present $2 each and the firm expects future cash flows to the tune of 48 million dollars. So the expected dividend in the future per share is $4.8 as the dividend record date if we assume 14 December. So the X dividend date is equal to December 12. Now X dividend date where the stock is set to trade come dividend. So the price using the come dividend is equal to $42 per share and the price considering the X dividend comes to $40 per share. You see that there is a decrease of $2 when the share goes X dividend from $2 to $40. And that decrease shows that in a perfect capital market when the dividend is paid the share price drops by the amount of the dividend paid to the shareholders and that happens when the stock begin to trade as X dividend. The other aspect is also there that there has been a decline of $20 million cash in the firm's reserve on its balance sheet and as a cash in its asset side. So this decline in the balance sheet has become a cost to reduce the firm's share price accordingly. The second option with the board of directors to pay dividend is the share repurchase. Now let's consider the effect of share repurchase in the firm share price. Existing price per share is $42 each and price after repurchase is also $42 each. Now if we see this the expected dividend per share in the future is now $5.04. So there is an increase over the current share price current dividend per share which is $4.8 and using this expected share price the price of the share come equal to $42 each as we discount this expected future price over the firm's unlivered cost of capital. So we see that the increase in future dividend compensates the current shareholders because at present these shareholders are foregoing their current dividend of $4.8 per share. This means that an open market share repurchase in perfect capital market settings has no effect on the stock price and the stock price of the share in remains the same as the come dividend price because the dividend were paid instead. Now the question is there that whether the investor would prefer cash dividend or the stock repurchase in a case of share repurchase option. The answer of this depends upon the question whether the shareholder needs cash now or not. Now let's see an example that an investor is holding 200 shares of the firm, 2000 shares of the firm, the wealth on cash dividend with the shareholder this shareholder comes to $84,000 and after repurchase transaction there is no effect on the shareholder's wealth and that remains at $84,000. Now the difference in fact is due to the cash and stock holdings. Now assume that the investor's preference because he is preferring not going for the repurchase due to his need for the cash so in this case there is although a repurchase transaction but the investor needs cash for his personal needs. Now the investor is holding 2000 shares at the rate of 42 rupees $2 each so his total holding is $84,000 and from these 2000 shares the investor will sell 95 shares at $42 each and the investor will get a $4,000 cash. Now although the investor is holding now 1,905 shares at a share market price of $80,000 but the total value of shares with the firm with the shareholder is again $84,000. So there is a repurchase but the shareholder can sell the shares in the market and get an amount of cash to the tune of $4,000 so in this way the shareholder, this particular shareholder has arranged a homemade dividend for herself. There is another prospect on this investor's performance that he is not going for the cash but the firm is going for the repurchase. Let's see that investor use the dividend receipt to purchase 100 more shares from the market at the share market price of $40 each in this way the shareholders a new shareholding will reach to the tune of $84,000 having 2100 shares at the cost of $40 each. This means that if we consider these two scenarios then any blend of cash and stock can be created by selling shares or reinvesting the dividend proceeds in the open market by the shareholder at its own. This means that in perfect capital markets investors are indifferent between the choices of cash dividend and the share repurchase via the dividend because by selling the shares or reinvesting the cash proceeds in the market to purchase shares the shareholders can manipulate either pay out method on their own. The third option with the board of directors is to issue new equity and to distribute the proceeds among the shareholders as cash dividend. Let's see that the firm has planned some higher amount of cash dividend and for that purpose the amount of dividend is planned to the tune of $48,000,000. The firm has access amount of pre-cash flows to the tune of $20,000,000. In this way the firm needs to raise extra amount of $28,000,000 through the issuance of equity so that the overall amount of $48,000,000 can be distributed among the shareholders. Now raising cash through the sale back of investment is only possible that the firm is scaling back its investments having positive net present value but that action of the firm will decrease its overall value. This means that it is better to raise new issue of equity and the new shares to issue are $0.67,000,000 because in order to raise $28,000,000 cash the firm need to sell shares at a market price of $42,000,000 each in this way the firm can raise $0.67,000,000 shares in this way the new dividend per share will be equal to $4.5,000 each. Now the come dividend share price is again equal to $42 per share. This means that the initial share price value is unchanged by this policy of the firm of new equity issue because there is increasing in the dividend and that increase in the dividend has no effect on the shareholders overall value. In the table we see the effect of all three policies on the dividend paid per share in at present and in the future. We see that for policy one and policy two there is an increase in the future dividend but for policy three there is a decline in the future dividend and if we sum this effect we can develop a table that there is a trade off of equity for new issue of equity the current dividend per share will be high but as in future there will be more outstanding shares so the future dividend per share will be low but as far as repurchase of share is concerned current dividend per share will be low but in the days to come the outstanding number of shares will be low so in future the future dividend per share will go high. Now the next effect of this equity trade off is that it is better to leave the total present value of the future dividends and therefore the current share price will remain unchanged. We see that in perfect capital markets securities are credited at zero net present value and therefore this transaction does not affect the firm's overall value. The investors when they use homemade leverage they can replicate firm's leverage choice which means that the firm choice of capital is then irrelevant and as this dividend irrelevant theory says that in perfect capital market holding investment policy fixed by a firm the firm's choice of dividend policy is then irrelevant and it does not affect the initial share price of the firm. A firm can alter its dividend payments through share repurchases or the issuance of new equity but these two transactions does not have any effect on the firm's value and its dividend policy. Remember that it is the dividend that determines the share price in the market and the dividend policy is not the factor that determines stock price in the market. The firm derives its value from its free cash flows and these are the free cash flows that determines firm's dividend payouts to its investors but in real world there are certain imperfections in capital markets that determine a dividend and its payout policy.