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Unformatted text preview: ions 22 Irrelevancy of Dividend Policy: Perfect capital markets A firm wants to increase dividends without changing its investment and borrowing The firm can only issue more shares and use the proceeds to pay dividends With assets and earning capacity of the firm fixed, there must be a transfer of value from old to new shareholders The new shareholders get shares worth less than before the dividend was declared The old shareholders suffer a capital loss enough to offset the extra dividends received. 23 Irrelevancy of Dividend Policy: Perfect capital markets 24 Irrelevancy of Dividend Policy: Perfect capital markets Dividends and Dividend Policy 25 Are dividends are relevant? If dividend at a particular date increases, the present value of dividend stream The value of the stock goes up. Dividend policy, as we have just seen, is irrelevant. Dividend policy only establishes the tradeoff between dividends today and dividends to be paid tomorrow. Once we allow for time value of money, the present value of the dividend stream is unchanged. 26 Some Real World Factors F...
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