week12 - Week 12 Tutorial Emily Lo Dividends Cash non cash...

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Week 12 Tutorial Emily Lo
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Dividends Does dividend policy affect firm value? - Dividend irrelevance theory - Tax Preference theory - Bird-in-the-Hand theory - Agency Theory - Information Content effect theory - The Clientele theory P 0 = D t (1+ R ) t t =1 n
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Dividend Irrelevance Theory Dividend policy does not affect the value of the firm or its cost of capital because Firm value is determined by the earning power and risk of its assets Shareholders can change a firm’s dividend payout ratio to suit their needs by reinvesting dividends or selling shares themselves >> homemade dividend policy But assumption of perfect capital market is not realistic >> taxes >> uncertainty regarding a firm’s investment
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Tax Preference Theory Taxes influence SH preference for dividends Dividends are taxed as income >> in classical tax system, effective income tax rate on dividend is typically higher than for capital gains tax >> in imputation system, effective income tax rate on dividends is lower Investors in classical tax system would value firm which adopt low dividend payout policy - Dividend policy negatively related to share price Shareholders require a higher pre-tax return from firm that provide high dividend payout policy to
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week12 - Week 12 Tutorial Emily Lo Dividends Cash non cash...

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