Chapter 15 - CHAPTER15 Signalingeffects Residualmodel...

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    15-1 CHAPTER 15 Distributions to shareholders:    Dividends and share repurchases Investor preferences on dividends Signaling effects Residual model Dividend reinvestment plans Stock repurchases Stock dividends and stock splits
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    15-2 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?
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    15-3 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.
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    15-4 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 a high P 0 .
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    15-5 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.
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    15-6 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 
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This note was uploaded on 03/21/2010 for the course BUSINESS AB102 taught by Professor Woo during the Spring '10 term at Nanzan.

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Chapter 15 - CHAPTER15 Signalingeffects Residualmodel...

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