Chapter 15

Chapter 15 - 14-1Ch 15 Distributions to shareholders:...

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Unformatted text preview: 14-1Ch 15 Distributions to shareholders: Dividends and share repurchasesInvestor preferences on dividendsSignaling effectsResidual modelDividend reinvestment plansStock repurchasesStock dividends and stock splits14-2What is dividend policy?The decision to pay out earnings versus retaining them for reinvesting.The money retained is to finance the investment projects to be undertaken. The dividend policy is therefore considered as part of financing (capital structure) decisions. Dividend policy includesHigh or low dividend payout?Stable or irregular dividends?How frequent to pay dividends?Announce the policy?14-3Different Arguments for Dividend Payments1. The Dividend Irrelevancy Theory 2. The Clientele Effects3. The Signaling Theory14-4Dividend irrelevance theoryInvestors are indifferent between dividends and retention-generated capital gains. If dividends are paid, investors can use it for consumption or for reinvestment. If they reinvest, their wealth will grow at the rate of return from the reinvestment;If dividends are retained, the company can use it to finance its investment project, thus making the company grow which in turn will raise the stock price. As investors still hold on to the stock, their wealth raises too; If assumed that investors will receive the same rate of return for the reinvestment themselves as the rate of return as retained by the company, their wealth will rise in the same rate;Proposed by Modigliani and Miller and based on unrealistic assumptions (no taxes or brokerage costs), hence may not be true. Need an empirical test.14-5Dividend irrelevance theoryBut the selection of stock portfolio might be affected by investors cash flow preferences; some investors prefer dividends and other prefer capital gains. The Dividend Irrelevance Theory is largely not true.Then what are the reasons that some investors prefer stocks that pay dividends while others prefer stocks that retain earnings for fast capital gains?14-6What is the Clientele Effect?Different groups of investors, or clienteles, prefer different dividend policies.Firms past dividend policy determines its current clientele of investors.Clientele effects impede changing dividend policy. Taxes & brokerage costs hurt investors who have to switch companies.14-7Why Some Investors Prefer Dividends?...
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Chapter 15 - 14-1Ch 15 Distributions to shareholders:...

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