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Chapter 14 - Dividend policy. This chapter examines the factors that influence a company’s choice of dividend policy, pros and cons of dividend policies, mechanics of dividend payments, stock dividends, share repurchase plans. | 14 Dividend Policy Introduction This chapter examines the factors that influence a company’s choice of dividend policy. Pros and cons of dividend policies Mechanics of dividend payments Stock dividends Share repurchase plans Influencing the Value of the Firm Investment Decisions Determine the level of future earnings and future potential dividends Financing Decisions Influence the cost of capital, which can determine the number of acceptable investment opportunities Dividend Decisions Influence the amount of equity capital in a firm’s capital structure and the cost of capital In making these interrelated decisions, the goal is to maximize shareholder wealth. Determinants of Dividend Policy Dividend policy determines how the earnings of a company are distributed. Earnings are either retained and reinvested in the company or are paid out to shareholders. In recent years, the retention of earnings has been a major source of equity financing for private industry. Determinants of Dividend Policy Retained earnings are the most important source of equity. Retained earnings can be used to stimulate growth in future earnings and as a result can influence future share values. On the other hand, dividends provide stockholders with tangible current returns. Determinants of Dividend Policy Variations in payout Legal constraints Restrictive covenants Tax considerations Liquidity and CF considerations Borrowing capacity Access to capital markets Earnings stability Growth prospects Inflation Shareholder preference Protection against dilution Industry and Company Variations in Dividend Payout Ratios Dividend payout policies vary among different industries. As shown in Table 14.1, there is a wide variation in dividend payout ratios among different industries, ranging from 0.4 to 104 percent. Industry and Company Variations in Dividend Payout Ratios Likewise, within a given industry, while many firms may have similar dividend payout ratios, there can still be considerable variation. | 14 Dividend Policy Introduction This chapter examines the factors that influence a company’s choice of dividend policy. Pros and cons of dividend policies Mechanics of dividend payments Stock dividends Share repurchase plans Influencing the Value of the Firm Investment Decisions Determine the level of future earnings and future potential dividends Financing Decisions Influence the cost of capital, which can determine the number of acceptable investment opportunities Dividend Decisions Influence the amount of equity capital in a firm’s capital structure and the cost of capital In making these interrelated decisions, the goal is to maximize shareholder wealth. Determinants of Dividend Policy Dividend policy determines how the earnings of a company are distributed. Earnings are either retained and reinvested in the company or are paid out to shareholders. In recent years, the retention of earnings has been a major source of equity financing for private industry. Determinants of Dividend
