1. DIVIDENDS POLICY FEUI Program Studi Maksi – PPAK Manajemen Keuangan Kuliah III 20.04.2009 RWJJ CH. 18 Sugeng Purwanto Ph.D, FRM 1

2. TYPES OF DIVIDENDS 1.CASH DIVIDENDS 2.STOCK DIVIDENDS Note: Stock split is also a kind of stock dividend. Which is usually much larger. 2

3. DIVIDENDS AND INVESTMENT POLICY FIRMS SHOULD NEVER GIVE UP A POSITIVE NPV PROJECT TO INCREASE OR TO PAY A DIVIDEND 3

4. DIVIDENDS vs STOCK REPURCHASE Why do some firms choose repurchase stock over dividends? 1.Flexibility. A firm with a permanent increase in cash flow is likely to increase its dividends. A firm whose cash flow increase is temporary is likely to repurchase shares of stock. 2. Executive compensation. Executives are frequently given stock options as part of their overall compensation. Existing stock options will always have greater value when the firm repurchases shares instead of paying a dividend because the stock price will be greater after a repurchase than after a dividend. 4

5. 3.Offset to dilution. The exercise of stock options increases the number of shares outstanding and causes dilution of the stock. Firms frequently buy back shares of stock to offset this dilution. 4.Undervaluation. Many companies buy back stock because they believe that a repurchase is their best investment. This occur more frequently when managers believe that the stock price is temporarily depressed. 5.Taxes. Repurchases provide a tax advantage over dividends. 5

6. REAL-WORLD FACTORS FAVORING A HIGH DIVIDEND POLICY 1.DESIRE FOR CURRENT INCOME 2.BEHAVIORAL FINANCE 3.AGENCY COSTS 4.INFORMATION CONTENT OF DIVIDENDS: DIVIDEND SIGNALING 6

7. A SENSIBLE PAYOUT POLICY THE FIRMS WITH MANY POSITIVE NPV PROJECTS RELATIVE TO AVAILABLE CASH FLOW SHOULD HAVE LOW DIVIDEND PAYOUT RATIO. FIRMS WITH FEWER POSITIVE NPV PROJECTS RELATIVE TO AVAILABLE CASH FLOW MIGHT WANT TO CONSIDER HIGHER DIVIDEND PAYOUT RATIO. THERE IS SOME BENEFIT TO DIVIDEND STABILITY AND MOST FIRMS AVOID UNNECESSARY CHANGES IN DIVIDEND PAYOPUT RATIO. 7

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