Dividend Policy

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The purpose of this paper is to help management must decide on the form of the dividend distribution, generally as cash dividends or via a share buyback. Various factors may be taken into consideration: where shareholders must pay tax on dividends, firms may elect to retain earnings or to perform a stock buyback, in both cases increasing the value of shares outstanding. Alternatively, some companies will pay "dividends" from stock rather than in cash.

The purpose of an optimal dividend policy should be to maximize shareholders’ wealth. This depends on both current dividends and capital gains. Capital gains can be achieved by retaining risome earnings for reinvestment and dividend growth
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So, investors view dividend increases as signals of management’s view of the future. Therefore, a stock price increase at time of a dividend increase could reflect higher expectations for future EPS, not a desire for dividends.

Researchers argue whether there exists an optimal dividend policy.
a) Dividend irrelevance theory—a firm’s dividend policy does not affect the value of a firm.
b) Dividend relevance theory—the dividend policy is an important factor in the determination of a firm’s value.

II-The Residual Dividend Policy.
It is a starting point to set an optimal policy that is why change prices is a long-run decision when it is declared, managers must sustain it at the declared level otherwise any unexpected increase or decrease in dividends will affect the price of the stock. This doesn’t mean that a change individual may lead to change in price of the stock, but the change in dividend entails information about the future prosperity of the firm negatively or positively.

The firm’s objective is to meet its investment needs and maintains its desired debt-equity ratio before paying dividends. Find the retained earnings needed for the capital budget. Pay out any leftover earnings (the residual) as dividends. This policy minimizes flotation and equity signaling costs, hence minimizes to find the WACC.
Using the Residual Model to Calculate Dividends Paid:

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