Dividend Policy and Retained Earnings参考.ppt

Dividend Policy and Retained Earnings 18 Chapter Outline Decisions on use of firm’s annual earnings Dividends and the dividend policy Factors influencing the dividend policy Stock dividends and stock splits Repurchase of the firm’s shares The Marginal Principle of Retained Earnings Benefits to stockholders analyzed by comparing: Rate of return on retained earnings Earnings that may be generated by offering dividends Project financed by internally generated funds must provide a higher rate of return: Compared to what stockholders can achieve on other investments Life Cycle Growth and Dividends Dividends as a Passive Variable Dividends are paid out only if the corporation cannot make better use of the funds for the benefit of stockholders Active decision variable is the retained earnings Residual (after fulfilling internal corporate expenses) is paid to stockholders Cash dividends An Incomplete Theory Residual theory of earnings does not consider the stockholders’ opinion on dividends It is considered acceptable, if the stockholders’ only concern is achieving highest returns : Corporate retained earnings remaining in the business Paid out as current dividends If however, the stockholder prefers one over the other option, then this theory is incomplete Arguments for the Relevance of Dividends Dividends resolve uncertainty in the minds of investors It can be hypothesized that stockholders might: Apply a higher discount rate (Ke), and Assign a lower valuation of funds that are retained in the business Because of the information content of dividends –viewed more favorably than retained earnings to the stockholders Stockholder’s needs and preferences go beyond the marginal principle of retained funds Arguments for the Relevance of Dividends (cont’d) In practice, it appears that most corporations adhere to the following logic: Investment opportunities relative to a required return (marginal analysis) are determined Then, it is tempered by subjective notion of stockholders’