PowerPoint to accompany Chapter 12 Dividend Policy Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition Learning Goals: Understand cash dividend payment procedures, the tax treatment of dividends and the role of dividend reinvestment plans. Describe the residual theory of dividends and the key arguments with regard to dividend irrelevance and relevance. Discuss the key factors involved in formulating a dividend policy. Review and evaluate the three basic types of dividend policies. Evaluate share dividends from accounting, shareholder and company points of view. Explain share splits and share buybacks and the firm’s motivation for undertaking each of them. Discuss the implications of the dividend imputation tax system for dividend policy. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition Dividend Fundamentals Dividends are the key return variable from which owners and investors determine share value. The decision whether to pay dividends will have a significant affect on the firm’s external financing requirements. The larger the dividends paid, the greater the amount of financing that may need to be raised externally through borrowing or the sale of shares. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition Cash Dividend Payment Procedures Whether, and in what amount to pay a dividend is decided at the semi annual meeting of a company’s board of directors. Amount Of Dividends: Generally in accordance with the company’s policy, but may be altered depending on the financial circumstances at the time. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition Timing: based upon the following relevant dates: • Declaration Date • Record Date • Ex Dividend Date • Payment Date Cash Dividend Payment Procedures Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition Cash Dividend Payment Procedures Page 521. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition Dividend Reinvestment Plans Introduced into Australia in the early 1980’s, and greatly enhanced the appeal of shares to some shareholders. Enable shareholders to use dividend entitlements to acquire additional shares without transaction costs and generally below market price. Under the scheme shareholders may elect to receive issued shares in lieu of their cash dividend entitlement. The number of shares the shareholder will receive is based on the cash dividend otherwise payable and the current market value of the shares. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition The Residual Theory Of Dividends Does dividend policy matter, and what effect does it have on share price? The Residual Theory Of Dividends: suggests that the dividend paid by a firm should be viewed as the residual amount left over after all acceptable investment opportunities have been undertaken. If the firm’s equity financing need was greater than the balance of retained earnings no cash dividends would be paid. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition The Residual Theory Of Dividends Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition The Residual Theory Of Dividends Table 12.1, Page 525.