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ch13 - CHAPTER 13 DIVIDEND POLICY LEARNING LG1 LG2 LG3...

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L E A R N I N G G O A L S 558 D IVIDEND P OLICY C H A P T E R Across the Disciplines WHY THIS CHAPTER MATTERS TO YOU Accounting: You need to understand the types of dividends and payment procedures for them because you will need to record and report the declaration and payment of dividends; you also will provide the financial data that management must have to make dividend decisions. Information systems: You need to understand types of divi- dends, payment procedures, and the financial data that the firm must have to make and implement dividend decisions. Management: In order to make appropriate dividend decisions for the firm, you need to understand types of dividends, the fac- tors that affect dividend policy, types of dividend policies, and arguments about the relevance of dividends. Marketing: You need to understand factors affecting dividend policy because you may want to argue that the firm would be better off keeping funds for the development of new products, rather than paying them out as dividends. Operations: You need to understand factors affecting dividend policy because you may find that the firm’s dividend policy imposes limitations on expansion. Review and evaluate the three basic types of divi- dend policies. Evaluate stock dividends from accounting, share- holder, and company points of view. Explain stock splits and stock repurchases and the firm’s motivation for undertaking each of them. LG6 LG5 LG4 Understand cash dividend payment procedures and the role of dividend reinvestment plans. Describe the residual theory of dividends and the key arguments with regard to dividend irrelevance and relevance. Discuss the key factors involved in formulating a dividend policy. LG3 LG2 LG1 13
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559 G eneral Electric Co., the world’s largest firm in terms of market capi- talization, has paid dividends to its share- holders continually since 1899. In mid- December 2001, a time when many companies were cutting or eliminating dividends to save cash, the company announced its 26th consecutive dividend increase. GE raised its quarterly dividend from 16 cents to 18 cents and also increased its stock repurchase program from $22 billion to $30 billion. “Today’s increases, in both our dividend and our share repurchase program, signal our confidence in our ability to extend this track record of returning value to shareowners,” Jeff Immelt, chairman and CEO, said in a prepared statement. This was quite an accomplishment during a most challenging year. “GE is built to outper- form,” said Immelt in September 2001, shortly after the World Trade Center attacks. “I was chair- man for two days, and then I had jets with my engines hit a building I insured, which was covered by a network I owned, and we still grew (2001) earnings by 11 percent. I think we’re in pretty good shape.” He attributes the company’s strong position to its diversified business model, which includes financial services, broadcasting, appliances, aerospace, industrial products, and power systems. Despite a weak economy, GE was able to increase net profits 9 percent during the fourth
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