Chapter 17 Payout Policy
CHAPTER 17: PAYOUT POLICY
Chapter 17 Learning Objectives
1. Describe how dividends are paid out and how corporations decide how much to pay.
2. Explain how stock repurchases are used to distribute cash to investors.
3. Explain why dividend increases and repurchases are good news for investors and why dividend cuts are bad news.
4. Explain why payout policy would not affect shareholder value in perfect and efficient financial markets.
5. Show how market imperfections, especially the different tax treatment of dividends and capital gains, can affect payout policy.
Payout Policy
Firms can pay cash to shareholders in two major ways; cash dividends and share repurchases.
This chapter analyzes both options and provides the student with insight into a firm’s payout policy decisions.
Chapter 17 Outline
• Methods of Paying Shareholders
• Paying Dividends
• Cash Dividends
• Stock Dividends
• Key Dates
• Stock Repurchases
• Share Valuation
• The Dividend Discount Model
• “Smooth” Dividend Policy
• Information Signaling
• The Payout Controversy
• Dividend Policy is Irrelevant to Firm Value
• Dividend Policy Adds Value
• Dividend Policy Reduces Value
• Taxation
How Corporations Pay Cash to Shareholders
Corporations can pay shareholders by paying a dividend or by repurchasing shares. Cash Dividend – Payment of cash by the firm to its shareholders.
Stock repurchase – Firm buys back stock from its shareholders.
Paying Dividends
Cash Dividend – Payment of cash by the firm to its shareholders.
• Regular Dividend – A dividend that is expected to be paid consistently into the future.
• Special Dividend – A dividend that is not likely to be repeated.
Stock Dividend/Split – Distributions of additional shares to a firm’s stockholders.
Stock Dividends: Example
Imagine a corporation currently has 10 million shares outstanding selling at $60 per share and declares a three-for-two stock split.
After the split, how many shares
Chapter 17 Learning Objectives
1. Describe how dividends are paid out and how corporations decide how much to pay.
2. Explain how stock repurchases are used to distribute cash to investors.
3. Explain why dividend increases and repurchases are good news for investors and why dividend cuts are bad news.
4. Explain why payout policy would not affect shareholder value in perfect and efficient financial markets.
5. Show how market imperfections, especially the different tax treatment of dividends and capital gains, can affect payout policy.
Payout Policy
Firms can pay cash to shareholders in two major ways; cash dividends and share repurchases.
This chapter analyzes both options and provides the student with insight into a firm’s payout policy decisions.
Chapter 17 Outline
• Methods of Paying Shareholders
• Paying Dividends
• Cash Dividends
• Stock Dividends
• Key Dates
• Stock Repurchases
• Share Valuation
• The Dividend Discount Model
• “Smooth” Dividend Policy
• Information Signaling
• The Payout Controversy
• Dividend Policy is Irrelevant to Firm Value
• Dividend Policy Adds Value
• Dividend Policy Reduces Value
• Taxation
How Corporations Pay Cash to Shareholders
Corporations can pay shareholders by paying a dividend or by repurchasing shares. Cash Dividend – Payment of cash by the firm to its shareholders.
Stock repurchase – Firm buys back stock from its shareholders.
Paying Dividends
Cash Dividend – Payment of cash by the firm to its shareholders.
• Regular Dividend – A dividend that is expected to be paid consistently into the future.
• Special Dividend – A dividend that is not likely to be repeated.
Stock Dividend/Split – Distributions of additional shares to a firm’s stockholders.
Stock Dividends: Example
Imagine a corporation currently has 10 million shares outstanding selling at $60 per share and declares a three-for-two stock split.
After the split, how many shares