chapter14 - Contemporary Financial Management Chapter 14:...

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© 2004 by Nelson, a division of Thomson Canada Limited Contemporary Financial Management Chapter 14: Dividend Policy
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© 2004 by Nelson, a division of Thomson Canada Limited 2 Introduction This chapter examines the factors that influence a  company’s choice of dividend policy The pros and cons of dividend policies The mechanics of dividend payments Stock dividends Share repurchase plans
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© 2004 by Nelson, a division of Thomson Canada Limited 3 Dividends When a company earns a profit, there are only two  things it can do with the earnings: Pay a dividend to the shareholders Retain the earnings in the form of Retained Earnings The choice as to how to divide firm earnings between  Retained Earnings and Dividends and the implications  of the choice made is the subject of this chapter.
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© 2004 by Nelson, a division of Thomson Canada Limited 4 Influencing the Value of the Firm Investment Decisions Determine the level of future earnings and future  potential dividends Financing Decisions Influence the cost of capital, which can determine the  number of acceptable investment opportunities Dividend Decisions Influence the amount of equity in a firm’s capital  structure and the cost of capital
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© 2004 by Nelson, a division of Thomson Canada Limited 5 Determinants of Dividend Policy Legal Constraints A firm’s capital cannot be used to pay dividends  (capital impairment restriction) earnings (net earnings restriction) Dividends cannot be paid when a firm is insolvent  (insolvency restriction) Usually imposed by creditors to prevent excessive  withdrawals by owners
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© 2004 by Nelson, a division of Thomson Canada Limited 6 Determinants of Dividend Policy Tax considerations Investment income can be received as a capital gain or  as a dividend The marginal tax rate will determine which form of  income is preferred by investors Liquidity and Cash Flow Considerations Dividends represent an outflow of cash Access to New Equity and Debt Capital A firm may decide to pay dividends and simultaneously  issue new equity or borrow
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© 2004 by Nelson, a division of Thomson Canada Limited 7 Determinants of Dividend Policy Variability of Earnings  (stable vs. growth) The more stable the earnings pattern, the greater the  percentage of earnings the firm can safely pay out as a 
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This note was uploaded on 05/20/2010 for the course DOF AAf001-6 taught by Professor Changchungdo during the Spring '10 term at 카이스트, 한국과학기술원.

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chapter14 - Contemporary Financial Management Chapter 14:...

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