Objectives

After reading this chapter, students should be able to:

1. Define target payout ratio and optimal dividend policy.

2. Discuss the three theories of investors’ dividend preference: (1) the dividend irrelevance theory, (2) the “bird-in-the-hand” theory, and
   (3) the tax preference theory; and whether empirical evidence has determined which theory is best

3. Explain the information content, or signaling, hypothesis and the clientele effect.

4.  Explain the logic of the residual dividend policy, and state why firms are more likely to use this policy in setting a long-run target than as a strict determination of dividends in a given year.

5. Explain the use of dividend reinvestment plans, distinguish between the two types of plans, and discuss why the plans are popular with certain investors.

6.  List a number of factors that influence dividend policy in practice.

7.   Discuss why the dividend decision is made jointly with capital structure and capital budgeting decisions.

8.  Specify why a firm might split its stock or pay a stock dividend.

9.  Discuss stock repurchases, including advantages and disadvantages, and effects on EPS, stock price, and the firm’s capital structure.

Specific Topics

• Dividend Policy

• Dividend Policy Theories:

  • Irrelevance Theory

  • "Bird-in-the-hand" Theory

  • Tax Preference Theory

• Information Content/Signaling Hypothesis

• Clientele Effect

• Residual Dividend Model

  • Advantages & Disadvantages

• Dividend Reinvestment Plan (DRIP)

  • Open Market Plan

  • New Stock Plan

• Stock Repurchases

  • Advantages & Disadvantages

• Stock Dividends vs. Stock Splits

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