CHAPTER 14 - Dividend Policy Two ways company can provide a...

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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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This document was uploaded on 11/01/2011 for the course FIN 301 at Miami University.

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CHAPTER 14 - Dividend Policy Two ways company can provide a...

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