CFFM6_ch 14_slides - Distributions to Shareholders Chapter...

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Unformatted text preview: Distributions to Shareholders Chapter 14 Investor Preferences on Dividends Signaling Effects Residual Dividend Model Dividend Reinvestment Plans Stock Repurchases Stock Dividends and Stock Splits 14-1 What is dividend policy? The decision to pay out earnings versus retaining and reinvesting them. Dividend policy includes High or low dividend payout? Stable or irregular dividends? How frequent to pay dividends? Announce the policy? 14-2 Dividend Irrelevance Theory Investors are indifferent between dividends and retention-generated capital gains. Investors can create their own dividend policy If they want cash, they can sell stock. If they don’t want cash, they can use dividends to buy stock. Proposed by Modigliani and Miller and based on unrealistic assumptions (no taxes or brokerage costs), hence may not be true. Need an empirical test. 14-3 Why Investors Might Prefer Dividends May think dividends are less risky than potential future capital gains. If so, investors would value high-payout firms more highly, i.e., a high payout would result in 14-4 Why Investors Might Prefer Capital Gains May want to avoid transactions costs Maximum tax rate is the same as on dividends, but … Taxes on dividends are due in the year they are received, while taxes on capital gains are due whenever the stock is sold. If an investor holds a stock until his/her death, beneficiaries can use the date of the death as the cost basis and escape all previously accrued capital gains. 14-5 What’s the information content, or signaling, hypothesis? Investors view dividend increases as signals of management’s view of the future. Since managers hate to cut dividends, they won’t raise dividends unless they think the raise is sustainable. However, a stock price increase at time of a dividend increase could reflect higher expectations for future EPS, not a desire for dividends....
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This note was uploaded on 06/11/2009 for the course BUS 314 taught by Professor Mais during the Summer '09 term at University of Hawaii, Manoa.

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CFFM6_ch 14_slides - Distributions to Shareholders Chapter...

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