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Unformatted text preview: tra dividend, but definitely won’t be repeated Liquidating dividend – some or all of the business has been sold What is dividend policy? What is dividend policy? The decision to pay out earnings versus retaining and reinvesting them. Dividend policy includes High or low dividend payout? Stable or irregular dividends? How frequent to pay dividends? Dividend Policy in Practice Dividend Policy in Practice Constant dividend policy Constant growth dividend policy – dividends increased at a constant rate each year Constant payout ratio – pay a constant percent of earnings each year Residual dividend policy – pay a nonconstant percent of earnings each year What is the “residual dividend What is the “residual dividend policy”? Find the retained earnings needed for the capital budget. Pay out any leftover earnings (the residual) as dividends. This policy minimizes cost to the firm. Residual Dividend Policy Residual Dividend Policy Determine capital budget Determine target capital structure Finance investments with a combination of debt and equity in line with the target capital structure Remember that retained earnings are equity If additional equity is needed, issue new shares If there are excess earnings, then pay the remainder out in dividends Example: Residual dividend policy Exampl...
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This document was uploaded on 01/14/2014.

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