CHAPTER 15 Dividend Policy

11/15/97


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Table of Contents

CHAPTER 15 Dividend Policy

What is “dividend policy”?

What are the three elements of dividend policy?

Do investors prefer high or low payouts? There are three theories:

Dividend Irrelevance Theory

Bird-in-the-Hand Theory

Tax Preference Theory

What are the implications of the three theories for managers?

Possible Stock Price Effects

Possible Cost of Equity Effects

Have empirical tests proved which theory is most correct?

What is the “information content,” or “signaling,” hypothesis and how does it affect dividend policy?

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What is the “clientele effect” and how does it affect dividend policy?

What impact might dividend policy have on agency costs?

What is the residual dividend model?

Example

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If NI were $350,000, or $700,000, what would the dividend be?

How would a change in investment opportunities affect the dividend under the residual dividend policy?

If the firm forecasts $100,000 of depreciation cash flow plus a net income of $600,000, what would the residual dividend payout ratio be?

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What are the advantages and disadvantages of the residual dividend model?

Conclusion

What is a dividend reinvestment plan (DRIP)?

Open Market Purchase Plan

New Stock Plan

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Steps in Setting Dividend Policy

Stock Repurchases

Advantages of Repurchases

Disadvantages of Repurchases

Stock Dividends vs. Stock Splits

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Should firms use small stock dividends?

When should stocks be split?

Author: Vickie Bajtelsmit