LEC8: Dividends and dividend policy When a company distributes value through a dividend, it reduces retained earnings therefore reduces equity therefore reduces the claim the shareholders have Types of dividends:1.Cash: shareholders receive company’s profitsnot too low but not too high, companies maintain their dividend payment not too volatile as this will make them company look bad (one time you’re paying high one time you’re paying low – rep and makes share price low in market)2.Special dividendDividends and taxation:-Imputation: means there’s no double taxation on dividendsa.Classical tax system: not that goodb.Imputationtax system: no double taxation so good, makes shares attractive to invest in Mechanism of the imputation tax system:-Profit after tax: what you pay dividends from-When the dividend is paid, the shareholder will receive a franking credit which represents the amount of tax that is paid on that dividend -So, when the shareholders do their tax return it’s the cash they received (franked dividend) + franking credit = taxable income -On this table, the second last line means out of $30 franking credit thecompany already paid $15 so the shareholder has to pay $15 (additional tax payable) to avoid double taxation aka imputation
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The dividend payment process: - this is for public companies 1.The board has a board2.The public announcement: when they say, they will go to the market and say they are going to pay the dividend and the amount-
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