Dividend Policy - Finance and Economics - Lecture Notes, Study notes of Finance

Download Dividend Policy - Finance and Economics - Lecture Notes and more Study notes Finance in PDF only on Docsity! 1 Dividend Policy Important dates - Announcement Date - Ex Dividend Date - Holder of Record Date - Payment Date Dividend policy will affect the growth of the firm’s earnings g = b (ROE) g = growth (from constant growth model) b = 1 - dividend pay out ratio ROE = Return on equity - the earnings retained to invest EXAMPLE OF GROWTH THROUGH RETENTION If the Dividend Pay out Ratio = 40% b = 1 - .40 = 60% If ROE = 15% then g = .60 (15%) = 9% If the Dividend Pay out Ratio = 0%, then g = 1.0 (15%) = 15% If the Dividend Pay out Ratio = 100%, then g = 0 (15%) = 0% Docsity.com 2 GROWTH IN EARNINGS COMPANY A EPS GROWTH DIV PAYOUT ROE 1992 $4 1997 $5 4.6% 60% 11.5% 2002 $6 3.7% 60% 9.25% 2007 $7 3.1% 60% 7.75% THEORIES ON DIVIDEND POLICY • MILLER MODIGLIANI - DIVIDENDS ARE IRRELEVANCE - SELL STOCK FOR CASH NEEDS • GORDON LITNER - BIRD IN HAND Docsity.com