ch 15 - Distributions to Shareholders Chapter 15 Investor...

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Unformatted text preview: Distributions to Shareholders Chapter 15 Investor Preferences on Dividends Signaling Effects Residual Dividend Model Dividend Reinvestment Plans Stock Repurchases Stock Dividends and Stock Splits 15-1 What is dividend policy? The decision to pay out earnings versus retaining and reinvesting them. Dividend policy includes High or low dividend payout? Stable or irregular dividends? How frequent to pay dividends? Announce the policy? 15-2 Dividend Irrelevance Theory Investors are indifferent between dividends and retention-generated capital gains. Investors can create their own dividend policy If they want cash, they can sell stock. If they dont want cash, they can use dividends to buy stock. Proposed by Modigliani and Miller and based on unrealistic assumptions (no taxes or brokerage costs), hence may not be true. Need an empirical test. 15-3 Why Investors Might Prefer Dividends May think dividends are less risky than potential future capital gains. If so, investors would value high-payout firms more highly, i.e., a high payout would result in a high P . 15-4 Why Investors Might Prefer Capital Gains May want to avoid transactions costs Maximum tax rate is the same as on dividends, but Taxes on dividends are due in the year they are received, while taxes on capital gains are due whenever the stock is sold. If an investor holds a stock until his/her death, beneficiaries can use the date of the death as the cost basis and escape all previously accrued capital gains. 15-5 Whats the information content, or signaling, hypothesis? Investors view dividend increases as signals of managements view of the future. Since managers hate to cut dividends, they wont raise dividends unless they think the raise is sustainable. However, a stock price increase at time of a dividend increase could reflect higher expectations for future EPS, not a desire for dividends....
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ch 15 - Distributions to Shareholders Chapter 15 Investor...

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