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Dividendpolicy 090421213325 Phpapp02
Dividendpolicy 090421213325 Phpapp02
Quiz 2
Explain in detail why we have to calculate cost of capital? Why cost of debt is usually cheaper than cost of equity?
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Dividend Fundamentals
Dividend growth tends to lag behind earnings growth for most corporations Since dividend policy is one of the factors that drives an investors decision to purchase a stock, most companies announce their dividend policy and telegraph any expected changes in policy to the public. Therefore, it can be seen that many companies use their dividend policy to provide information not otherwise available to investors.
Copyright 2006 Pearson Addison-Wesley. All rights reserved.
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From its point of view, the firm can issue new shares to participants more economically, avoiding the under pricing and flotation costs that would accompany the public sale of new shares.
Copyright 2006 Pearson Addison-Wesley. All rights reserved.
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On the other hand, large, mature firms generally pay cash dividends since they have access to adequate capital and may have limited investment opportunities.
Copyright 2006 Pearson Addison-Wesley. All rights reserved.
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Fixed or increasing dividends are often considered a positive signal, while erratic dividend payments are viewed as negative signals.
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As mentioned earlier, investors view volatile dividends as negative and riskywhich can lead to lower share prices.
Copyright 2006 Pearson Addison-Wesley. All rights reserved.
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When earnings are higher than normal, the firm will pay this additional dividend, often called an extra dividend, without the obligation to maintain it during subsequent periods.
This type of policy is often used by firms whose sales and earnings are susceptible to swings in the business cycle.
Copyright 2006 Pearson Addison-Wesley. All rights reserved.
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Because 10,000 new shares (10% x 100,000) have been issued at the current price of $15/share, $150,000 ($15/share x 10,000 shares) is shifted from retained earnings to the common stock and paid-in-capital accounts.
Copyright 2006 Pearson Addison-Wesley. All rights reserved.
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For example, assume a stockholder owned 100 shares at $20/share ($2,000 total) before a stock dividend.
If the firm declares a 10% stock dividend, the shareholder will have 110 shares of stock. However, the total value of her shares will still be $2,000. Therefore, the value of her share must have fallen to $18.18/share ($2,000/110).
Copyright 2006 Pearson Addison-Wesley. All rights reserved.
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Research on both stock splits and stock dividends generally supports the theory that they do not affect the value of shares. They are often used, however, to send a signal to investors that good things are going to happen.
Copyright 2006 Pearson Addison-Wesley. All rights reserved.
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The gain on the increase in share price as a result of the repurchase, however, would not be taxed until sold.
Copyright 2006 Pearson Addison-Wesley. All rights reserved.
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Thesis
Analysis Determinants that affecting Dividend Policy Analysis Factors that affecting Financial Performance of the Firm Liquidity versus Profitability, which one must comes first? Determining Optimal Capital Structure for the Firm Analysis of Improving Working Capital and Liquidity for the Firm Liquidity and Autocorrelations in Individual Stock Returns Credit Rating and Capital Structure Analysis