Distributions to Shareholders Dividends and Share Repurchases

The dividend policy has grown over the years. This may be so that the company projects itself as a less risky share and thus also gaining investors faith. The investors buy its shares and thus increase its demand. This helps to gives positive signals to the investors signalling that the company is stable and can generate earnings steadily. This hypothesis is gains standing from the dividend hypothesis theory.

Prompt: Once you have read the article “Comparing the Accuracy and Explainability of Dividend, Free Cash Flow, and Abnormal Earnings Equity Value Estimates” and Chapters 6 and 7 of your text, review and complete the questions below. Use the article and your text to inform your responses to the questions below.

George C. Philippatos and William W. Sihler, 'Models of Dividend Policy', Financial Management (Allyn and Bacon), 228-229

If earnings' growth rates are often used as estimated of dividend growth rates. However, these forecasts

| (TCO C) Blease Inc. has a capital budget of $625,000, and it wants to maintain a target capital structure of 60 percent debt and 40 percent equity. The company forecasts a net income of $475,000. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

In order to understand the dividend policies of a company the dividend payout ratio and the dividend yield ratio are identified. Investors focus on the stock price and the dividends to decide whether to cash in on a stock. At the same time, the performance of a stock when compared to the overall industry performance is necessary when buying and purchasing stocks. Investors receive dividends regularly, based on the declared dividends that are mostly affected by the earnings.

These ratios are the most closely viewed by creditors, investors and management (Cornett, Adair & Nofsinger, 2009). The dividend payout ratio is the amount paid to stockholders and the retained earnings ratio is the opposite (Sustainable Personal Finance, 2011). It is the amount that must be held back in order to make the payout.

What’ s more, although investors like the dividend, it is just period solution to attack people and it may not be able to keep the company growing in a long run.

stock price, which in turns spurs future production and investment in that company. If the

Since the emergence of the so-called irrelevance theorem by Miller and Modigliani (1961), many corporations are puzzled about why some firms pay dividends while others do not. They were the first to study the effect of dividend policy on the market value of firms by assuming that there are no market imperfections. Miller and Modigliani (1961) proposed that divided policy chosen by a firm has no significant relationship in as far as the market valuation of the firm is concerned. They went further to explain that; the shareholders wealth remains unchanged irrespective of how the firm distributes it income because the firms’ value is rather determined by their investment policies and the earning power of its assets. They further stated that the opportunity to earn abnormal returns in the market does not exist, that is, owners are entitled to the normal market returns adjusted for risk.

c. How should FPL choose between dividends and share repurchases as alternative modes of payment?

A higher payout ratio would not be appropriate, especially in a changing environment where competition is about to surface. A lower payout ratio would be more appropriate as it would give the company the necessary cash needed for capital investments that would generate growth without high leverage.

The dividends that stockholders receive and the value of their stock shares depend on the business’s profit performance. Managers’ jobs depend on living up to the business’s profit goals.

While conducting the analysis of EMI group’s dividend policy, one factor that stood out to us was the clientele effect. The clientele effect shows us who holds most of our outstanding shares. High tax-bracket individuals would prefer zero-to-low dividend payout to save on taxes. Low tax-bracket individuals would prefer a low-to-medium dividend payout, which gives them additional income while helping them save on taxes. An investing corporation would prefer a higher dividend payout because if they own a significant amount of shares, say 1 million, the income stream from that dividend would provide the company with more monetary resources while benefitting from tax exemptions. So before setting a dividend policy for EMI group, we must first

There are many theoretical and empirical results describing the decisions companies make in this area. At the same time, however, there is no generally accepted model describing payout policy. Moreover, empirical findings are often contradictory or difficult to interpret in light of the theory. In their seminal paper, Miller and Modigliani (1961) showed that under certain assumptions dividends are irrelevant; all that matters is the firm’s investment opportunities. Miller and Modigliani considered the case of perfect capital markets (no transaction costs or tax differentials, no pricing power for any of the participants, no information asymmetries or costs), rational behaviour (more wealth being preferred to less, indifference between cash payments and share value increases) and perfect certainty (future investments and profits are given). In real life, however, people seem to care about dividends. Lintner.s (1956) classical study on dividend policy suggests that dividends represent the primary and active decision variable in most situations. Lintner suggests a model of partial adjustment to a given payout rate.