Week 11 Lecture - Dividend Policy - Theory and Evidence (Chapters 14) 6 per page

Week 11 Lecture - Dividend Policy - Theory and Evidence (Chapters 14) 6 per page

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2/10/2010 1 FINS 1613 Week 11 Lecture Notes Dividend Policy: Theory and Evidence Chapter 14 Dividends and Dividend Policy 1 Key Concepts and Skills ± Understand dividend types and how they are paid ± Understand the issues surrounding dividend policy decisions ± Understand the difference between cash and share dividends ± Understand why share repurchases are an alternative to dividends 2 Chapter 14 Outline ± Cash Dividends and Dividend Payment ± Does Dividend Policy Matter? ± Establishing a Dividend Policy Share Rep rchase An Alternati e to Cash ± Share Repurchase: An Alternative to Cash Dividends ± Bonus Issues and Share Splits 3 WHAT IS A DIVIDEND? ± Definition: A payment made by a firm out of its current or accumulated retained earnings to its owners. ± Broad types: 1. Cash 2. Stock 4 Cash Dividend Types ± Regular cash dividend – cash payments made directly to shareholders, usually each quarter ± Extra cash dividend – indication that the “extra” amount may not be repeated in the future ± Special cash dividend – similar to extra dividend, but definitely won’t be repeated ± Liquidating dividend – some or all of the business has been sold 5 HOW ARE CASH DIVIDENDS PAID? The distribution process is governed by law. ² Declaration dat : Directors announce dividend paymen 6 Declaration date : Directors announce dividend payment ² Cum-dividend : Share trades with dividend entitlement ² Ex-dividend date : Date from which share trades without dividend entitlement ² Record date : Date by which shareholder must be on firm’s records to receive dividend payment ² Payment Date : Date on which dividend is paid to shareholders on record.
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2/10/2010 2 Figure 14.2 The Ex-Day Price Drop 7 WHAT IS DIVIDEND POLICY? Definition: ± The firm’s decision regarding how much of its earnings it will pay out to its shareholders in the form of dividends. Who makes the decision: ± This decision is made by the Board of Directors. Quantifying the decision: ± This decision is quantified by the firm’s dividend payout ratio = DPS/ EPS. 8 DIVIDEND POLICY ISSUES 1. Should the firm pay dividends? ± Dividend policy and firm value ± Empirical evidence (Fama and French, 2001) 2. How much should the firm pay? ± Types of Policies ± Empirical and Survey evidence 9 SHOULD THE FIRM PAY DIVIDENDS? Decision rule: ± Firm should pay dividends if and only if it increases firm value Issue: ± Do dividends increase firm value 10 Does Dividend Policy Matter? ± Dividends matter – the value of the share is based on the present value of expected future dividends ± Dividend policy may not matter – Dividend policy is the decision to pay dividends versus retaining funds to reinvest in the firm – In theory, if the firm reinvests capital now, it will grow and can pay higher dividends in the future 11 DIVIDEND IRRELEVANCE THEORY ± Miller and Modigliani, [i.e., MM] (1961) Propose that : ± Dividend policy does not affect the value of the firm or its cost of capital ¾ Firm value determined by the earning power and risk of its
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This note was uploaded on 01/09/2012 for the course FINS 1613 taught by Professor Drkhshim during the Three '10 term at University of New South Wales.

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Week 11 Lecture - Dividend Policy - Theory and Evidence (Chapters 14) 6 per page

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