P1 DI Return Po If we pay dividends, stockholders receive an immediate cash reward for investing
• If we pay dividends, stockholders receive an immediate cash reward for investing, P1 - Po D1 Po Po Return = +
P1 DI Return Po If we pay dividends, stockholders receive an immediate cash reward for investing, but the capital gain will decrease, since this cash is not invested in the firm
• If we pay dividends, stockholders receive an immediate cash reward for investing, but the capital gain will decrease, since this cash is not invested in the firm. P1 - Po D1 Po Po Return = +
So, dividend policy really involves 2 decisions How much of the firms earnings should be distributed to shareholders as dividends and How much should be retained for capital investment?
So, dividend policy really involves 2 decisions: • How much of the firm’s earnings should be distributed to shareholders as dividends, and • How much should be retained for capital investment?
Is Dividend Policy important? Three viewpoints: 1)Dividends are Irrelevant. If we assume perfect markets(no taxes, no transaction costs, etc. dividends do not matter. If we pay a dividend, shareholders dividend yield rises, but capital gains decrease
Is Dividend Policy Important? Three viewpoints: 1) Dividends are Irrelevant. If we assume perfect markets (no taxes, no transaction costs, etc.) dividends do not matter. If we pay a dividend, shareholders’ dividend yield rises, but capital gains decrease
P1 DI Return Po With perfect markets. investors are concerned only with total returns, and do not care whether returns come in the form of capital gains or dividend vields
• With perfect markets, investors are concerned only with total returns, and do not care whether returns come in the form of capital gains or dividend yields. P1 - Po D1 Po Po Return = +