Implications for Corporate Policy Establish a policy that will maximize shareholder wealth Distribute excess funds to shareholders and stabilize the absolute amount of dividends if necessary (passive) Payouts greater than excess funds should occur only in an environment that has a net preference for dividends 18-11
18-11 Implications for Corporate Policy Establish a policy that will maximize shareholder wealth. Distribute excess funds to shareholders and stabilize the absolute amount of dividends if necessary (passive). Payouts greater than excess funds should occur only in an environment that has a net preference for dividends
Implications for Corporate Policy There is a positive value associated with a modest dividend could be due to institutional restrictions or signaling effects Dividends in excess of the passive policy does not appear to lead to share price improvement because of taxes and flotation costs 18-12
18-12 Implications for Corporate Policy There is a positive value associated with a modest dividend. Could be due to institutional restrictions or signaling effects. Dividends in excess of the passive policy does not appear to lead to share price improvement because of taxes and flotation costs
Factors Influencing Dividend Policy Legal rules n Capital Impairment Rule -many states prohibit the payment of dividends if these dividends impair capital (usually either par value of common stock or par plus additional paid-in capital) n Insolvency Rule - some states prohibit the payment of cash dividends if the company is insolvent under either a fair market valuation or equitable sense o Undue Retention of Earnings Rule-- prohibits the undue retention of earnings in excess of the present and future investment needs of the firm 18-13
18-13 Factors Influencing Dividend Policy Capital Impairment Rule -- many states prohibit the payment of dividends if these dividends impair Capital (usually either par value of common stock or par plus additional paid-in capital). Insolvency Rule -- some states prohibit the payment of cash dividends if the company is insolvent under either a fair market valuation or equitable sense. Undue Retention of Earnings Rule -- prohibits the undue retention of earnings in excess of the present and future investment needs of the firm. Legal Rules
Factors Influencing Dividend Policy Other ssues to Consider Funding Needs of the Firm Liquidity Ability to Borrow Restrictions in Debt Contracts Control 18-14
18-14 Factors Influencing Dividend Policy Funding Needs of the Firm Liquidity Ability to Borrow Restrictions in Debt Contracts Control Other Issues to Consider