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Corporate Financial Management 3e
Emery Finnerty Stowe
Why Dividend Policy Matters
Learning Objectives
mon dividend policy characteristics.
Explain the mechanics of dividend payments.
Apply the three-step approach to dividend decisions.
Distinguish special dividends from regular dividends and stock dividends from cash dividends.
Describe five methods of share repurchase.
Chapter Outline
Dividend Policy in Practice
Why Does Dividend Policy Matter?
Asymmetric Information
Transaction Costs
The Role of e Taxes
Dividend Policy Guidelines
Applying the Dividend Policy Guidelines
Share Repurchases
Transferable Put Rights
Stock Dividends and Stock Splits
Dividend Policy and the Principles of Finance
Capital Market Efficiency
The potential to increase value through dividend policy is limited.
Risk-Return Trade-Off
Dividends versus retained earnings is a risk-return trade-off.
Signaling
Dividend changes can be viewed as new information, so they should be considered carefully.
Behavioral
Use the information in other firms’ dividends.
Dividend Policy and the Principles of Finance
Two-Sided Transactions
Share repurchases from takeover raiders transfer wealth to the raiders from the other shareholders.
Valuable Ideas
Look for dividend value creating ideas in connection with tax law changes.
Time Value of Money
Always correctly adjust for the time value of money
Options
Transferable put options may create value.
Dividend Policy in Practice
Preference for mon dividends
Smaller and younger firms
Mature firms
Stability of dividends
Dividends are more stable from year to year than are earnings.
They follow the trend in cash flow more closely.
Dividend Policy in Practice
Regular decisions
Review dividend policy at least annually, and at about the same time each year.
Regular payments
Quarterly payments mon.
Annual, semi-annual and monthly payments are mon.
Dividend Policy in Practice
Reluctance to cut dividends