Dividend Policy. Supplement to Chapter 17 FIL 341 Prepared by Keldon Bauer. Dividends or Capital Gains?. The ultimate goal of financial managers should be the maximization of shareholder wealth. Shareholder wealth can be maximized by maximizing the price of the stock.
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Supplement to Chapter 17
Prepared by Keldon Bauer
Dividends are not in the final equation!
Therefore, dividends are irrelevant to value!
Jumping on the Dividend Bandwagon:
The tax cut makes equity attractive in more ways than one
The dividendtax cut signed into law by President Bush in late May already is leading some publicly traded companies to boost the dividends they pay shareholders, hoping it will help the share price. And even those that can't afford to offer much in the way of dividends may find a way to benefit from other parts of the tax law changes. Last week Goldman Sachs and Bank of America joined the companies that have jumped on the dividend bandwagon. Goldman last week more than doubled its dividend to $0.25 per share, and BofA raised its quarterly dividend 25% to $0.80, from $0.64. One of the first companies to anticipate the dividend tax cut was Microsoft Corp., which announced its first-ever annual dividend, of $0.16, in January. . . .
Still, it's equity dividends that have suddenly become more attractive to investors. That has many publicly traded companies suddenly revisiting how they use their free cash. Many now are favoring dividends over their previous stock-boosting efforts, such as tax-advantaged share buybacks.
(Britt Erica Tunick, from Investment Dealers Digest, June 30, 2003)
b = Retention Ratio
b = Retention Ratio