1. Dividends and Dividend Policy

2. Dividend Definitions (Cash) Net Income Regular Cash Dividend Extra Dividend Special Dividend Asset SalesLiquidating Dividend

3. Dividend Chronology Declaration DateEx-Dividend Date Record DatePayment Date

4. Does Dividend Policy Matter? What determines whether dividend policy matters?

5. Are stock prices affected by dividends? The following assumptions tell us that dividend policy does not matter: –1. The firm’s investment decision will not change regardless of the firm’s dividend policy, and –2. Capital markets are perfect. What do the assumptions mean? How do they affect the relevance or irrelevance of dividend policy?

6. Implications of Fixed Investment and Dividend Decisions When the firm operates the same set of assets, regardless of what dividend policy it adopts, then 1. the cash flows generated by the assets will not be affected by the firm’s dividend decisions, and 2. the risk of those cash will not be affected by the firm’s dividend decision.

7. Implications of Perfect Capital Markets 1. There are no corporate nor personal taxes 2. There are no costs to resolving bankruptcy 3. There are no transactions costs for buying or selling stocks 4. There are no differences in the information available to managers of the firm and outside investors 5. All market participants have “equal access” to the market.

8. A Numerical Example of Why Dividends Don’t Affect Firm Value with our Assumptions Example 1: The firm pays all its earnings out as dividends. The discount rate is 20%. t = 0t = 1t = 2 t = 3 Net Income1,0001,0001,000 Dividend1,0001,0001,000 Present Value2,106

9. A Numerical Example of Why Dividends Don’t Affect Firm Value with our Assumptions Example 2: Investors want a $200 increase in dividends in years 1 and 2. t = 0t = 1t = 2 t = 3 Net Income1,0001,0001,000 Dividend From Earnings 1,0001,000 1,000 From New Equity 200 200 (528) Total1,2001,200 472 Return to New Equity Holders From Year 1 Infusion 288 From Year 2 Infusion 240 Present Value of Original Shareholders Claims 2,106

10. Market Imperfections that Influence Dividend Policy Factors Favoring Lower Dividends: Higher personal taxes Flotation Costs Dividend Restrictions Factors Favoring Higher Dividends Higher corporate taxes Distributing Company Receiving Company Desire for Current Income Uncertainty Resolution

11. Stock Price Reactions to Changes in Dividends Increases in Dividends Decreases in Dividends No Change in Dividends