Dividend Policy

1
Chapter 14

• Dividend Policy

2
Forms of Dividends

• Cash
• Stock
• Share repurchase
• Example page 539
• Desirable way of distributing earning, however,
  IRS do not permit regular stock repurchase as an
  alternative to cash dividends

3
How Dividends are Paid

• Dividend declaration and payment procedure
• Declaration date
• Ex-dividend date
• Record date
• Payment date
• Dividend reinvestment plans

4
Dividend Policies

• Passive residual
• Stable dollar
• Constant payout ratio
• Small quarterly dividend plus year-end extras

5
Determinants of Dividend Policy

• Legal constraints
• Law requirements
• Restrictive covenants
• Operation considerations
• Liquidity and cash flow considerations
• Borrowing capacity and access to the capital
  markets
• Earning stability, growth prospects
• Inflation
• Shareholder preferences
• Tax considerations
• Investment preference

6
Dividend Policy and Firm Value

• Irrelevance of dividends
• Signaling effects
• clientele effects
• Relevance of Dividends
• Risk aversion
• Transaction costs
• Taxes
• Floatation costs
• Agency costs

7
Homework

• Page 543 questions 1-18
• Page 544-547 problem 2, 3, 4, 11, 12