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Unformatted text preview: a small percentage of their earnings as dividends. Firms with few opportunities will have a larger dividend payout ratio. Establishing a Dividend Policy 11 Dividend Stability: Cyclical dividend policy: each quarter’s dividend can be a fixed percentage of that quarter’ earnings. Stable dividend policy: each quarter’s dividend can be a fixed percentage of that year’ earnings implying that all dividend payments will be equal. Establishing a Dividend Policy 12 Dividend Stability Dividend cuts are viewed as undesirable as they may be a sign of financial difficulties. Consequently most companies will increase dividends only when cash flows are sufficient to sustain them indefinitely Establishing a Dividend Policy 13 A compromise Dividend Policy: based on 5 goals Avoid cutting back on a positive NPV project to pay dividends Avoid dividend cuts Avoid new share issuance Maintain a target debt‐equity ratio Maintain a target dividend payout ratio Extra dividends are paid when an increase in earnings is thought to be transitory The Information in Dividends 14 How do investors separate marginally profitable firms from the real...
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- Spring '12