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Must be original work and at least 100 words.

Examine how is it possible that dividends are so important, but, at the same time, dividend policy is irrelevant. Provide one (1) example of dividends that supports your response.

May 31st, 2015
1. Dividend policy is irrelevant when there are no taxes or other imperfections
because shareholders can effectively undo the firm’s dividend strategy.
Shareholders who receive dividends greater than desired can reinvest the excess.
Conversely, shareholders who receive dividends smaller than desired can sell off
extra shares of stock.
2. Individual shareholder income taxes and new issue flotation costs are real-world
considerations that favor a low-dividend payout. With taxes and new issue costs,
the firm should pay out dividends only after all positive NPV projects have been
fully financed.
3. There are groups in the economy that may favor a high payout. These include many
large institutions such as pension plans. Recognizing that some groups prefer a high
payout and some prefer a low payout, the clientele effect argument supports the
idea that dividend policy responds to the needs of stockholders. For example, if 40
percent of the stockholders prefer low dividends and 60 percent of the stockholders
prefer high dividends, approximately 40 percent of companies will have a lowdividend
payout, and 60 percent will have a high payout. This sharply reduces the
impact of any individual firm’s dividend policy on its market price.
4. A firm wishing to pursue a strict residual dividend payout will have an unstable
dividend. Dividend stability is usually viewed as highly desirable. We therefore
discussed a compromise strategy that provides for a stable dividend and appears to
be quite similar to the dividend policies many firms follow in practice.
5. A stock repurchase acts much like a cash dividend, but has a significant tax
advantage. Stock repurchases are therefore a very useful part of overall dividend
To close out our discussion of dividends, we emphasize one last time the difference between
dividends and dividend policy. Dividends are important, because the value of a
share of stock is ultimately determined by the dividends that will be paid. What is less
clear is whether or not the time pattern of dividends (more now versus more later) matters.
This is the dividend policy question, and it is not easy to give a definitive answer to it.

May 31st, 2015

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May 31st, 2015
May 31st, 2015
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