1 / 7

# Dividend Policy: Theory and Practice - PowerPoint PPT Presentation

Dividend Policy: Theory and Practice. Why do corporations pay dividends? Does paying dividends Ý S/H wealth?. Mechanics of dividend payment. Decl. date Ex-div. Record Pmt. 3/4/03 4/17 (Th.) 4/21 (M) 5/9

Related searches for Dividend Policy: Theory and Practice

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.

## PowerPoint Slideshow about 'Dividend Policy: Theory and Practice' - royal

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

### Dividend Policy: Theory and Practice

Why do corporations pay dividends? Does paying dividends Ý S/H wealth?

Decl. date Ex-div. Record Pmt.

3/4/03 4/17 (Th.) 4/21 (M) 5/9

• Last day you can buy stock and get dividend: 4/16/02

• S.P. ¯ by the \$ amount of dividend on the ex-dividend date (theoretically)

Chhachhi/BA 519/Ch. 18

Miller-Modigliani (MM)’s Dividend Irrelevance Theorem

• Ass.: taxes=transaction costs=0 and

• Firm’s investment policy is unaffected by dividend policy

• Firmvalue (0 div.) = Firmvalue (­ div.) HOW?

• S/Hs receive returns in 2 forms:

• Dividends & Stock Price appreciation (CGs)

• ­ dividends, ¯ the CG and vice-versa

• Overall S/H’s returns are identical

• Indifferent to dividend policy

• S/Hs through their actions can alter the corporate dividend policy to suit their needs

• thus, corporation can’t do anything for the S/Hs that they can’t do for themselves

Chhachhi/BA 519/Ch. 18

If Taxes & Trans. costs ¹ 0, What should be firm’s div. policy?

• Tdiv. > Tcapital gains

• Investors are not indifferent to level of dividends

• prefer smaller or no dividends at all

• Firm with a # of +NPV projects

• not enough \$ to fund the projects & to pay dividends

• paying dividends Þ will have to raise funds in the market-- stock/bond issue

• investors have to pay taxes and firm has to pay issuance costs. lose-lose proposition

• Managers with excess cash

• Should pay dividends; Otherwise they would be tempted to spend the extra money on negative NPV projects

• Dividends serve as signal about firm’s future performance

• Clientele Effect

Chhachhi/BA 519/Ch. 18

• Repurchases can be used as a substitute (for dividends) mechanism for distributing cash

• Taxes make repurchases more attractive

• H.W. 2, 5, 7, 20

Chhachhi/BA 519/Ch. 18