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Chapter 17
DIVIDENDS AND PAYOUT POLICY
CHAPTER WEB SITES
Section
Web Address
CHAPTER ORGANIZATION
17.1 Cash Dividends and Dividend Payment
17.2 Does Dividend Policy Matter?
17.3 Real-World Factors Favoring a Low Dividend Payout
17.4 Some Real-World Factors Favoring a High Payout
17.5 A Resolution of Real-World Factors?
17.6 Stock Repurchase: An Alternative to Cash Dividends
17.7 What We Know and Do Not Know about Dividends and Payout Policies
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17.8 Stock Dividends and Stock Splits
17.9 Summary and Conclusions
ANNOTATED CHAPTER OUTLINE
Real-World Tip: Can the wrong dividend policy bankrupt a firm?
The following anecdote suggests that dividend policy can play a
role in a company’s downfall.
17.1. Cash Dividends and Dividend Payment
A. Cash Dividends
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B. Standard Method of Cash Dividend Payment
C. Dividend Payment: A Chronology
D. More on the Ex-Dividend Date
The stock price drops by approximately the amount of the dividend
Lecture Tip: You may wish to have the class consider if it would
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Therefore, if the marginal investor is in a positive tax bracket
International Note: It was widely reported that in 1988, nearly
13% of the daily average trading volume on the NYSE was
that we face in the U.S.
17.2. Does Dividend Policy Matter
A. An Illustration of the Irrelevance of Dividend Policy
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Lecture Tip: The idea that dividend policy (as opposed to
dividends) is irrelevant is difficult for many students to swallow.
Lecture Tip: Recall the dividend growth model:
B. Homemade Dividends
Real-World Tip: Dividend reinvestment plans (DRIPS) allow
investors to reinvest dividend income back into the issuing
company without paying commissions. Many plans also allow
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C. A Test
17.3. Some Real-World Factors Favoring a Low Dividend Payout
A. Taxes
B. Flotation Costs
C. Dividend Restrictions
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Lecture Tip: There is a conflict of interest between stockholders
17.4. Real-World Factors Favoring a High Payout
A. Desire for current income
Lecture Tip: A fascinating real-world example of the desire for
B. Tax and Other Benefits from High Dividends
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C. Conclusion
17.5. A Resolution of Real-World Factors?
A. Information Content of Dividends
Lecture Tip: Selling stock to raise funds for dividends also creates
B. The Clientele Effect
The clientele effect says that dividend policy is irrelevant because
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Lecture Tip: To put the clientele argument into a different light,
Lecture Tip: The dividend clientele argument suggests that
17.6. Stock Repurchase: An Alternative to Cash Dividends
A. Cash Dividends versus Repurchase
A firm may choose to buy back outstanding shares instead of
paying a cash dividend (or instead of increasing a regular
dividend). If we assume no market imperfections, then stockholder
wealth is unaffected by the choice between share repurchases and
cash dividends.
Real-World Tip: The dividend yield of DJIA firms fell for many
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B. Real-World Considerations in a Repurchase
Lecture Tip: Although share repurchases have traditionally been
viewed as positive signals from management, not everyone agrees.
Real-World Tip: A quick search of stock repurchase
announcements following the terrorist attacks on
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Lecture Tip: It should be pointed out that distributing cash
via share repurchases is desirable from the viewpoint of the
are undervalued.
C. Share Repurchase and EPS
17.7. What We Know and Do Not Know about Dividend Policy
A. Dividends and Dividend Payers
B. Corporations Smooth Dividends
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Lecture Tip: In July, 1995, Venture Corporation, a high-volume
C. Putting It All Together
This section can be summarized by five primary observations:
D. Some Survey Evidence on Dividends
17.8. Stock Dividends and Stock Splits
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Stock split – new outstanding shares issued to existing stockholders,
Lecture Tip: Some investors believe that it is desirable to purchase
a company’s stock prior to the announcement of the stock split.
A. Some Details about Stock Splits and Stock Dividends
B. Value of Stock Splits and Stock Dividends
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Lecture Tip: In theory, stock dividends and stock splits are
accounting issues and should not impact the value of the firm. Yet,
C. Reverse Splits
Three popular reasons:
Chapter 17 – Dividends and Payout Policy
Real-World Tip: Anecdotal evidence indicates that the number of
17.9. Summary and Conclusions