This preview shows page 1. Sign up to view the full content.
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.
View Full Document