ECON 2560 Chapter Notes - Chapter 14-18: Dividend Policy, Preferred Stock, Credit Risk
25 Nov 2014
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How dividends are paid: cash dividend, payment of cash by the firm to the shareholder. Anyone holding stock before this date is entitled: record date, person who owned stock on this date receives a dividend, payment date, date in which firm actually mails out dividend cheques. Share repurchase: stock repurchase, firm buys back stock from existing shareholders. Note that cash and stock repurchases leave the shareholder in the same financial position. How do companies decide on dividend payments: dividend payout ratio, percentage of earnings paid out as dividends. Why payout policy should not matter: the irrelevancy of dividend payments, since investors do not need dividend payments to convert shares to cash they will not pay higher prices for firms with higher dividend payouts. Therefore, dividend policy will have no impact on the value of the firm: modigliani and miller (mm) maintain that under ideal conditions, dividend policy is irrelevant.
