Dividends policy Flashcards
Dividends policy intro you talk about?
Dividends are profits which are returned to shareholders, they can impact a shareholders value, stock price and financial flexibility
What are the two theories you use in your introduction for dividends policy?
Dividends irrelevance hypothesis and bird in the hand theory
The first theory you talk about is and what do you mention at first?
Dividends irrelevance hypothesis by miller and Modigliani states that dividends have no impact on value or shareholder wealth in a perfect market, no matter low, high or no dividend.
After you introduce the dividend irrelevance hypothesis then what do you discuss?
The dividend irrelevance hypothesis assumes a lot. It assumes the follow:
No taxes, the hypothesis assumes that there are no taxes on dividends or when selling shareholder shares.
No transaction costs, the hypothesis assumes largely that you will use the homemade way of dividends or selling your shares without the use of brokers and their fees
No information asymmetry, the theory assumes that shareholders know as much as the managers do about the company.
Assumes perfect capital markets, it does not take into account restrictions or regulations regarding dividends
In basic, what is the bird in the hand cage, whats the first thing you mention about it?
The bird in the hand cage was created by Gordon and Lintner, it argues that shareholders prefer the profit payout from dividends over awaiting capital gains to increase meaning the stock price to increase to sell it.
After you introduce the bird in the hand cage theory then what do you discuss?
Risk aversion- Dividends payouts tend to be immediate and tangible, whereas with stocks, the future value can change fast and are uncertain to market fluctuations.
Cash in hand- Investors prefer cash in hand over promised increased value of stock
Impact on firm value, because dividends are seen as less likely, firms who use them tend to have increased stock prices as investors are willing to pay for the more predictable payouts
After the theories, what do you discuss next?
Factors influencing dividend policy.
Earnings stability- Shareholders like dividends because in a good market they can provide consistent payouts, however during back periods there can be flexibility or no dividends
Cash flows and liquidity- Firms who are profitable but do not have enough cash flow will not be able to payout dividends, this can be combatted by keeping a reserve of cash to pay shareholders even during financial downturns.
Growth- Some firms may want to instead of paying out dividends, use the cash flow and profits to grow and expand the business, prioritising less of dividends payout.
Market expectations- Shareholders expect during a firms financial good health to receive dividends, however the problem arises that even during good financial health, no dividends to shareholders can indicate that there is a poor financial health even if not true and so stock prices can lower.
After discussing the factors influencing dividends policy, what do you discuss net?
Advantages and disadvantages which you can make up in the fly BBBZZZZZZZZZZZZZZZZZZ
What will you discuss after advantages and disadvantages?
Conclusion, you just relay what you’ve said with thoughts.
