Review of learning goals understand cash dividend

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Unformatted text preview: levance of dividends is still evolving, the behavior of most firms and stockholders suggests that dividend policy affects share prices. It is therefore believed to be important for the financial manager to develop and implement a dividend policy that is consistent with the firm’s goal of maximizing stock price. REVIEW OF LEARNING GOALS Understand cash dividend payment procedures and the role of dividend reinvestment plans. The cash dividend decision is normally made by the board of directors, which establishes the record and payment dates. Generally, the larger the dividend charged to retained earnings and paid in cash, the greater the amount of financing that must be raised externally. Some firms offer dividend reinvestment plans that allow stockholders to acquire shares in lieu of cash dividends. LG1 Describe the residual theory of dividends and the key arguments with regard to dividend irrelevance and relevance. The residual theory suggests LG2 that dividends should be viewed as the earnings left after all acceptable investment opportunities have been undertaken. Miller and Modigliani argue in favor of dividend irrelevance, using a perfect world wherein information content and clientele effects exist. Gordon and Lintner advance the theory of dividend relevance, basing their argument on the uncertainty-reducing effect of dividends, supported by their bird-in-the-hand argument. Although the idea is intuitively appealing, empirical studies fail to provide clear support of dividend relevance. Even so, the actions of financial managers and stockholders tend to support the belief that dividend policy does affect stock value. CHAPTER 13 Discuss the key factors involved in formulating a dividend policy. A firm’s dividend policy should provide for sufficient financing and maximize the wealth of the firm’s owners. Dividend policy is affected by certain legal, contractual, and internal constraints, as well as by growth prospects, owner considerations, and market considerations. Legal constraints prohibit corporations from paying out as cash dividends any portion of the firm’s “legal capital”; they also constrain firms with overdue liabilities and legally insolvent or bankrupt firms from paying cash dividends. Contractual constraints result from restrictive provisions in the firm’s loan agreements. Internal constraints tend to result from a firm’s limited availability of excess cash. Growth prospects affect the relative importance of retaining earnings rather than paying them out in dividends. The tax status of owners, the owners’ investment opportunities, and the potential dilution of ownership are important owner considerations. Finally, market considerations are related to the stockholders’ preference for the continuous payment of fixed or increasing streams of dividends and the perceived informational content of dividends. LG3 Review and evaluate the three basic types of dividend policies. With a constant-payout-ratio dividend policy...
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This document was uploaded on 01/19/2014.

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