ch17 - Chapter 17 Dividends and Dividend Policy Learning...

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Chapter 17 Dividends and Dividend Policy Learning Objectives 1. Explain what a dividend is, and describe the different types of dividends and the dividend payment process. Calculate the expected change in a stock’s price around an ex- dividend date. 2. Explain what a stock repurchase is and how companies repurchase their stock. Calculate how taxes affect the after-tax proceeds that a stockholder receives from a dividend and from a stock repurchase. 3. Discuss the benefits and costs associated with dividend payments and compare the relative advantages and disadvantages of dividends and stock repurchases. 4. Define stock dividends and stock splits and explain how they differ from other types of dividends and from stock repurchases. 5. Describe factors that managers consider when setting the dividend payouts for their firms. I. Chapter Outline 17.1 Dividends The term payout policy is generally used to refer to a firm’s overall policy regarding distributions of value to stockholders.
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A dividend is something of value that is distributed to a firm’s stockholders on a pro-rata basis—that is, in proportion to the percentage of the firm’s shares that they own. A dividend can involve the distribution of cash, assets, or something else, such as discounts on the firm’s products that are available only to stockholders. When a firm distributes value through a dividend, it reduces the value of the stockholders’ claims against the firm. A dividend reduces the stockholders’ investment in a firm by returning some of that investment to them. A. Types of Dividends The most common form of dividend is the regular cash dividend , which is a cash dividend paid on a regular basis. These dividends are generally paid quarterly and are a common means by which firms return some of their profits to stockholders. The size of a firm’s regular cash dividend is typically set at a level that management expects the company to be able to maintain in the long run, barring some major change in the fortunes of the company. Management does not want to have to reduce the dividend. Management can afford to err on the side of setting the regular cash dividend too low because it always has the option of paying an extra dividend if earnings are higher than expected. Extra dividends are often paid at the same time as regular cash dividends and are used by some companies to ensure that a minimum portion of earnings is distributed to stockholders each year.
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A special dividend , like an extra dividend, is a one-time payment to stockholders. Special dividends tend to be considerably larger than extra dividends and to occur less frequently. They are used to distribute unusually large amounts of cash.
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This note was uploaded on 04/01/2012 for the course BUSINESS 100 taught by Professor Bens during the Spring '12 term at FIU.

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ch17 - Chapter 17 Dividends and Dividend Policy Learning...

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