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chapter 14 notes - BUS 320 Chapter 14 Notes 1 Income Earned...

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1 BUS 320 Chapter 14 Notes
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2 Income Earned By Corporation Can be used in three ways: Reinvested in operating assets Used to retire debt Distributed to stockholders If decide to distribute to shareholders, there are three key issues: How much should be distributed? Should distribution be in the form of dividend or share buyback ? How stable should the distribution be?
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3 Target Payout Ratio Percent of net income paid out in cash dividends, Should be based in large part on investors’ preferences for dividends versus capital gains.
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4 Optimal Dividend Policy Policy that strikes a balance between current dividends and the future growth and maximizes the firm’s stock price. P= D 1 r-g If increase d, price will move all else remaining constant. However, if raise d then less money will be available for reinvestment thus lowering g, This results in an offsetting effect.
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5 Dividend Irrelevance Theory States that a firm’s dividend policy has no affect on its cost of capital or its value.
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6 Reasons Investors Prefer Dividends Uncertainty of future Capital Gains
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