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Unformatted text preview: d stockholders Old stockholders The left part of Figure 11 illustrates the case where the firm finances the dividend with the new equity
issue and where new shareholders buy the new shares for cash, whereas the right part illustrates the case
where new shareholders buy shares from existing shareholders. As the net effect for both new and existing
shareholders are identical in the two cases, firm value must be equal. Thus, in a world with a perfect
capital market dividend policy is irrelevant.
8.11.5 Why dividend policy may increase firm value
The second view on the effect of the dividend policy on firm value argues that high dividends will
increase firm value. The main argument is that there exists natural clienteles for dividend paying stocks,
since many investors invest in stocks to maintain a steady source of cash. If paying out dividends is
cheaper than letting investors realise the cash by selling stocks, then the natural clientele would be willing
to pay a premium for the stock....
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.
- Spring '12