BU393 Study Guide - Quiz Guide: Free Cash Flow, Dividend Policy, Tax Bracket
Document Summary
Firms make distributions to their shareholders in 2 ways: Dividends reduce free cash flow and so reduce managerial waste. Forces managers to face scrutiny of capital markets when new project financing needed. Academics look at dividend policy as a cash flow issue in an m&m perfect world. Practioners look at dividend policy as a leverage and investment decision. In the absence of taxes, the firm should pay out internally generated funds as a dividends if investors have access to higher positive npv projects than does the firm. In the absence of transactions costs and taxes, dividend policy is irrelevant and does not affect shareholder wealth. Investors do not need dividends to convert shares to cash therefore, they will not pay higher prices for firms with higher dividend payouts. Dividend policy will have no impact on the value of the firm because investors can: Sell shares off a small part of the stock that has appreciated in value to create dividends.
