8. New Dividends

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Unformatted text preview: 1 Click to edit Master subtitle style 9/18/11 School of Business Administration University of Miami Payout Policy: Dividends Corporate Financial Management 9/18/11 22 Assigned Readings & Problems  Reading: EFS Chapter 18  In Chapter 18 do: › Questions/Challenging Questions: ALL › Problems: A1, A3-A7, A9-A11, B1-B4, B6-B9, C1 SEE END OF THE LECTURE NOTES FOR ADDITIONAL ASSIGNED PROBLEMS! 9/18/11 33 Objectives  Define dividend policy  Compare firms in different industries and at different stages of their life cycles and determine which are more likely to pay higher or lower dividends  Describe the key events and points of time that determine when and to whom a dividend is paid—the mechanics  Infer the optimal dividend policy for each of the six basic models of dividend policy  Integrate the key factors associated with dividend theory (across various models) and implement a practical dividend policy in several practice problems and situations 9/18/11 44 What is “Dividend Policy”?  Dividend Policy is the Decision whether to pay out earnings to common stockholders and if so, how much of those earnings pay vs. retain  Should the dividends be › A High or Low Payout ratio relative to earnings? › Stable or Irregular? › Frequent or Infrequent? › Announced as a Policy?  Fundamentally, these issues boil down to what policy investors prefer or what policy maximizes share price: › Does dividend policy affect the wealth of shareholders? 9/18/11 55 Cross-Industry Comparisons and  Dividend payout ratios differ substantially across industries: 9/18/11 66  Within industries, the decision to pay a dividend depends upon the size and age of the firm : › Dividends are less common among young firms › Dividends are less common among small and privately held firms › With growth and maturity, firms begin to pay dividends  Discussion: Any thoughts as to why firms exhibit these dividend policy differences? 9/18/11 77 Recent Changes in Corporate  The proportion of ALL public firms paying dividends fell from 66.5 percent in 1978 to 20.8 percent in 1999 (Fama and French, 2001)  Fama and French identify three characteristics that lead a firm to pay a dividend: › High Profitability › Low Investment opportunities › Greater Size of the firm In the 10 years after an IPO, only 3.7 percent of firms pay a dividend 9/18/11 88  Why?...
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This note was uploaded on 09/18/2011 for the course FIN 303 taught by Professor Bernile during the Spring '11 term at University of Miami.

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8. New Dividends - 1 Click to edit Master subtitle style...

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