The wall street journal stated that in hindsight ford

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Unformatted text preview: 3.5billion tire replacement project?) In 2001, not only did Ford have to cut its normal quarterly dividend, but its debt was downgraded because investment bankers decided Ford was now in a “cash crisis.” The Wall Street Journal stated that in hindsight, Ford management was wise to hoard cash against hard times, and investors were unwise to clamor for bigger payouts of cash to shareholders. Caution and prudence are virtues—and these virtues provide ethical justification for managers accused of putting self-interest ahead of shareholder interests. “Virtue theory” focuses on the character of the decision maker, over and above merely doing one’s duty. This area of ethics is now getting more attention, thanks to business guru Steven Covey and to ethicists such as Scott Rae, Kenman Wong, and Thomas Whetstone. In cases such as Ford’s, it is probably wisest to give managers the benefit of the doubt. rate managers are averse to changing the dollar amount of dividends in response to changes in earnings, particularly when earnings decline.7 In addition, stockholders are believed to value a policy of continuous dividend payment. Because regularly paying a fixed or increasing dividend eliminates uncertainty about the frequency and magnitude of dividends, the returns of the firm are likely to be discounted at a lower rate. This should result in an increase in the market value of the stock and therefore an increase in the owners’ wealth. A final market consideration is informational content. As noted earlier, shareholders often view a dividend payment as a signal of the firm’s future success. A stable and continuous dividend is a positive signal, conveying the firm’s good financial health. Shareholders are likely to interpret a passed dividend payment due to a loss or to very low earnings as a negative signal. The nonpayment of the dividend creates uncertainty about the future, which is likely to result in lower stock value. Owners and investors generally construe a dividend payment during a period of losses as an indication that the loss is merely temporary. 7. John Lintner, “Distribution of Income of Corporations Among Dividends, Retained Earnings, and Taxes,” American Economic Review 46 (May 1956), pp. 97–113. 570 PART 4 Long-Term Financial Decisions Review Question 13–5 What are the six factors that affect dividend policy? Briefly describe each of them. LG4 13.4 Types of Dividend Policies The firm’s dividend policy must be formulated with two basic objectives in mind: providing for sufficient financing and maximizing the wealth of the firm’s owners. Three of the more commonly used dividend policies are described in the following sections. A particular firm’s cash dividend policy may incorporate elements of each. dividend payout ratio Indicates the percentage of each dollar earned that is distributed to the owners in the form of cash. It is calculated by dividing the firm’s cash dividend per share by its earnings per share. constant-payout-ra...
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This document was uploaded on 01/19/2014.

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