Chapter 7 - Dividends and share repurchases: Analysis. This chapter compare theories of dividend policy and explain implications of each for share value, given a description of a corporate dividend action. | Chapter 7 Dividends and Share repurchases: Analysis Presenter’s name Presenter’s title dd Month yyyy 1 1. Introduction A payout policy is a set of principles regarding a corporation’s distributions to shareholders. May be established with regard to a dividend payout, a dividend per share, a growth in dividend per share, or any other metric. May include stock splits and stock dividends. May include stock repurchases. Copyright © 2013 CFA Institute 2 Page 258 Introduction A payout policy (also known as dividend policy) is a set of principles regarding a corporation’s distributions to shareholders. Note: Using the term “payout policy” encompasses repurchases, whereas the traditional term “dividend policy” implies cash and stock dividends as well as stock splits. May be established with regard to a dividend payout, a dividend per share, a growth in dividend per share, or any other metric. May include stock splits and stock dividends. May include stock repurchases. 2 2. Dividend Policy and Company Value: Theory Copyright © 2013 CFA Institute 3 LOS: Compare theories of dividend policy and explain implications of each for share value, given a description of a corporate dividend action. Page 258 2. Dividend Policy and Company Value: Theory Explanations for dividend policies: Dividend are irrelevant. A “bird in the hand”: Cash dividends are preferred to uncertain capital gains. Tax argument: Investors prefer capital gains to dividends if capital gains are taxed at a lower rate than capital gains. Other explanations/influences: Clientele effect, signaling, and agency cost effects. 3 Dividends are irrelevant In Miller and Modigliani’s (MM) world with no taxes, no transaction costs, and homogeneous information, dividend policy does not affect the value of the company. The decision of how a company finances its business is separate from the decision of what and how much to invest in capital projects. If an investor wants cash flow, he/she could sell some shares. If an investor | Chapter 7 Dividends and Share repurchases: Analysis Presenter’s name Presenter’s title dd Month yyyy 1 1. Introduction A payout policy is a set of principles regarding a corporation’s distributions to shareholders. May be established with regard to a dividend payout, a dividend per share, a growth in dividend per share, or any other metric. May include stock splits and stock dividends. May include stock repurchases. Copyright © 2013 CFA Institute 2 Page 258 Introduction A payout policy (also known as dividend policy) is a set of principles regarding a corporation’s distributions to shareholders. Note: Using the term “payout policy” encompasses repurchases, whereas the traditional term “dividend policy” implies cash and stock dividends as well as stock splits. May be established with regard to a dividend payout, a dividend per share, a growth in dividend per share, or any other metric. May include stock splits and stock dividends. May include stock repurchases. 2 2. Dividend Policy and
