CFFM6, ch 14, IM, 11-12-08 - Chapter 14 Distributions to...

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Unformatted text preview: Chapter 14 Distributions to Shareholders: Dividends and Share Repurchases Learning Objectives After reading this chapter, students should be able to: Explain why some investors like the firm to pay more dividends while other investors prefer reinvestment and the resulting capital gains. Discuss the various trade-offs that companies face when trying to establish their optimal dividend policy. Differentiate between stock splits and stock dividends. List the advantages and disadvantages of stock repurchases vis--vis dividends from both investors and companies perspectives. Chapter 14: Distributions to Shareholders Learning Objectives 1 Lecture Suggestions We like this chapter and generally cover it in its entirety, but it could be omitted in the introductory course without loss of continuity. Or, sections such as stock dividends or stock repurchases could be omitted. What we cover, and the way we cover it, can be seen by scanning the slides and Integrated Case solution for Chapter 14, which appears at the end of this chapter solution. For other suggestions about the lecture, please see the Lecture Suggestions in Chapter 2, where we describe how we conduct our classes. DAYS ON CHAPTER: 3 OF 58 DAYS (50-minute periods) 2 Lecture Suggestions Chapter 14: Distributions to Shareholders Answers to End-of-Chapter Questions 14-1 The biggest advantage of having an announced dividend policy is that it would reduce investor uncertainty, and reductions in uncertainty are generally associated with lower capital costs and higher stock prices, other things being equal. The disadvantage is that such a policy might decrease corporate flexibility. However, the announced policy would possibly include elements of flexibility. On balance, it would appear desirable for directors to announce their policies. 14-2 While it is true that the cost of outside equity is higher than that of retained earnings, it is not necessarily irrational for a firm to pay dividends and sell stock in the same year. The reason is that if the firm has been paying a regular dividend, and then cuts it in order to obtain equity capital from retained earnings, there might be an unfavorable effect on the firms stock price. If investors lived in the world of certainty and rationality postulated by Miller and Modigliani, then the statement would be true, but it is not necessarily true in an uncertain world....
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CFFM6, ch 14, IM, 11-12-08 - Chapter 14 Distributions to...

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