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Lecture Note Two - NTU - 2009
Lecture Note Two - NTU - 2009
Dividend Policy
S0- De-rt
Taxes
In a world of personal taxes,
firms should not issue stock
Gov. to pay a dividend.
Corporate Finance Lecture Note 2 39
Firms with Sufficient Cash
• The above argument does not necessarily
apply to firms with excess cash.
• Consider a firm that has $1 million in cash
after selecting all available positive NPV
projects.
– Select additional capital budgeting projects
(by assumption, these are negative NPV).
– Acquire other companies
– Purchase financial assets
– Repurchase shares
Corporate Finance Lecture Note 2 40
Taxes and Dividends
• In the presence of personal taxes:
1. A firm should not issue stock to pay a
dividend.
2. Managers have an incentive to seek
alternative uses for funds to reduce
dividends.
3. Though personal taxes mitigate against the
payment of dividends, these taxes are not
sufficient to lead firms to eliminate all
dividends.
Corporate Finance Lecture Note 2 41
Dividends Preference Theory
Theory Implication
• Dividend Change
DIV1 - DIV0 target change
target ratio EPS1 - DIV0
Corporate Finance Lecture Note 2 55
The Dividend Decision
• Dividend changes confirm the following