FMchap14 - After reading this chapter, students should be...

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Unformatted text preview: After reading this chapter, students should be able to: Define target payout ratio and optimal dividend policy. Discuss the three theories of investors dividend preference: (1) the dividend irrelevance theory, (2) the bird-in-the-hand theory, and (3) the tax preference theory; and whether empirical evidence has determined which theory is best. Explain the information content, or signaling, hypothesis and the clientele effect. Identify the two components of dividend stability, and briefly explain what a stable dividend policy means. Explain the logic of the residual dividend policy, and state why firms are more likely to use this policy in setting a long-run target than as a strict determination of dividends in a given year. Explain the use of dividend reinvestment plans, distinguish between the two types of plans, and discuss why the plans are popular with certain investors. List a number of factors that influence dividend policy in practice. Discuss why the dividend decision is made jointly with capital structure and capital budgeting decisions. Specify why a firm might split its stock or pay a stock dividend. Discuss stock repurchases, including advantages and disadvantages, and effects on EPS, stock price, and the firms capital structure. Learning Objectives: 14 - 1 Chapter 14 Distributions to Shareholders: Dividends and Share Repurchases LEARNING OBJECTIVES 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. Assuming you are going to cover the entire chapter, the details of what we cover, and the way we cover it, can be seen by scanning Blueprints , Chapter 14. 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: 2 OF 58 DAYS (50-minute periods) Lecture Suggestions: 14 - 2 LECTURE SUGGESTIONS 14-1 a. From the stockholders point of view, an increase in the personal income tax rate would make it more desirable for a firm to retain and reinvest earnings. Consequently, an increase in personal tax rates should lower the aggregate payout ratio. b. If the depreciation allowances were raised, cash flows would increase. With higher cash flows, payout ratios would tend to increase. On the other hand, the change in tax-allowed depreciation charges would increase rates of return on investment, other things being equal, and this might stimulate investment, and consequently reduce payout ratios. On balance, it is likely that aggregate payout ratios would rise, and this has in fact been the case....
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This note was uploaded on 05/29/2011 for the course HRM 100 taught by Professor Elijahchen during the Spring '11 term at Abraham Baldwin Agricultural College.

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FMchap14 - After reading this chapter, students should be...

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