CHAPTER 14 - DividendPolicy Twowayscompanycanprovideareturn

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Dividend Policy Two ways company can provide a return  of their pro-rate share of the profits to the  shareholders: Cash Dividends Capital Gains Through use of Retained Earnings to make new  investments in productive assets and grow  revenues/income in the future Through repurchasing some of the outstanding stock
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Dividend Policy Decision firm makes about the Percent of  Income the firms pays out in cash dividends  – called the Dividend Payout Ratio (DPO) Dividend Yield = (annual $ dividend/current  stock price)   For the firm, it is a trade off between  paying investors now and future growth For Investors it is a trade off between  current income and capital gain (future  income).  
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Theoretical views of Dividend  Policy Dividend Irrelevance: Investors are indifferent between current  income and capital gains.  (return is return).  If  the firms pays a dividend and want more  capital, it just sells new stock.  If investors  didn’t want a dividend, they can use it to  purchase more stock Assumes perfect capital markets.
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CHAPTER 14 - DividendPolicy Twowayscompanycanprovideareturn

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