CHAPTER 7
DIVIDENDS AND SHARE REPURCHASES: ANALYSIS
LEARNING OUTCOMES
After completing this chapter, you will be able to do the following:
- Compare theories of dividend policy and explain implications of each for share value, given a description of a corporate dividend action.
- Describe types of information (signals) that dividend initiations, increases, decreases, and omissions may convey.
- Explain how clientele effects and agency issues may affect a company’s payout policy.
- Explain factors that affect dividend policy.
- Calculate and interpret the effective tax rate on a given currency unit of corporate earnings under double-taxation, split-rate, and tax imputation dividend tax regimes.
- Compare stable dividend, target payout, and residual dividend policies and calculate the dividend under each policy.
- Explain the choice between paying cash dividends and repurchasing shares.
- Describe global trends in corporate dividend policies.
- Calculate and interpret dividend coverage ratios based on (1) net income and (2) free cash flow.
- Identify characteristics of companies that may not be able to sustain their cash dividend.
SUMMARY OVERVIEW
- There are three general theories on investor preference for dividends. The first, MM, argues that given perfect markets dividend policy is irrelevant. The “bird in hand” theory contends that investors value a dollar of dividends today more than uncertain capital gains in the future. The third theory argues that in countries in which dividends are taxed ...
