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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
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This document was uploaded on 01/14/2014.
- Winter '14