Dividends are paid in cash or in stocks. The decision to repurchase shares may be thought as an alternative to payment of a cash dividend (the price of the shares should increase because the shareholders own now a bigger part of the capital). Dividends are not a business expense.
Dividend policy is usually reflected by the current dividend to earnings ratio = the payout ratio
It is not possible to determine it quantitatively. To the extent that the firm is able to earn a higher return, reinvestment of retained earnings may be justified. Those with high CF relative to positive NPV opportunities might pay dividends. This means profit and consequently taxation for the firm. Moreover, individuals investors also pay taxes (low level because gov. want to avoid double taxation) for dividends received.
But stockholders prefer steady dividends. Secondly, the stock market reacts positively to increases in dividend and negatively to decreases in dividends. This suggest that there is information content in dividend payment.
The tax effect is the strongest argument in favor of low dividends and the preference for current income is the strongest argument in favor of high dividends.
Debt Policy and the effect of leverage >>
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Corporate finance
The subject: corporate finance
PART ONE: CAPITAL EXPENDITURE
The present value
Investment
decisions
Practical
problems in capital budgeting
Firms evaluation
PART TWO. BASICS OF FINANCE
The financial
markets
Options
The market
efficiency
Risk
Mergers,
Acquisitions, and Corporate Control
International
Financial Management
PART THREE FINANCING DECISIONS
Corporate
financing
Dividend policy
and capital structure
PART FOUR FINANCIAL MANAGEMENT
Financial
planning
Short-term
financial management
Courses created and updated by Dr David Chelly, PhD in Management sciences from the University of Tours.
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