1. © 2003 The McGraw-Hill Companies, Inc. All rights reserved. Dividends and Dividend Policy Chapter Eighteen

2. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc. All rights reserved. 18.1 Chapter Outline Dividend Types and Dividend Payment Does Dividend Policy Matter? Real-World Factors - Factors Favoring a Low Payout - Factors Favoring a High Payout Establishing a Dividend Policy Stock Repurchase: An Alternative to Cash Dividends Stock Dividends and Stock Splits

3. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc. All rights reserved. 18.2 Dividend Types Regular cash dividend Extra cash dividend Special cash dividend Liquidating dividend

4. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc. All rights reserved. 18.3 Dividend Payment Declaration Date Ex-dividend Date Date of Record Date of Payment

5. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc. All rights reserved. 18.4 Does Dividend Policy Matter? Dividends matter – the value of the stock is based on the present value of expected future dividends Dividend policy may not matter - decrease now is exactly offset by an increase later - homemade dividends

6. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc. All rights reserved. 18.5 Factors Favoring a Low Payout Taxes Flotation costs Dividend restrictions

7. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc. All rights reserved. 18.6 Factors Favoring a High Payout Desire for current income Uncertainty resolution Taxes/Legal Considerations

8. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc. All rights reserved. 18.7 Establishing a Dividend Policy Residual dividend policy Constant payout ratio Compromise dividend policy

9. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc. All rights reserved. 18.8 Stock Repurchase Company buys back its own shares of stock Similar to a cash dividend in that it returns cash from the firm to the stockholders Investors face capital gains taxes instead of ordinary income taxes. (Capital gains are taxed at lower rate)

10. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc. All rights reserved. 18.9 Stock Dividends Pay additional shares of stock instead of cash Increases the number of outstanding shares, reduces stock price.

11. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc. All rights reserved. 18.10 Stock Splits Stock splits – essentially the same as a stock dividend except expressed as a ratio –For example, a 2 for 1 stock split is the same as a 100% stock dividend Increases the number of shares, reduces stock price