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Companies dividend policy

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ingénierie financière

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  1. Introduction
  2. Background on dividends and the three basic theories
    1. Background
    2. Different types of dividends
    3. Procedural aspects of paying dividends
    4. Irrelevance of Dividend Policy
    5. Assumptions of irrelevance theory
    6. The proof of the dividend irrelevance theory
    7. Tax Preference theory
    8. The history of dividend taxation
    9. Double taxation
    10. The proof of the tax preference theory
    11. The 'Bird in the hand' theory
    12. The wrong reasons for paying dividends
    13. Good reasons for paying dividends
  3. Dividend Policy in practice
    1. Confusion of empirical tests and factors that influence the Dividend Policy
    2. Signalling
    3. The clientele effect
    4. Dividend stability
    5. Residual dividend model
    6. Share repurchases
    7. Stock dividends
    8. Stock split
    9. Setting a Dividend Policy
    10. Payout ratio
    11. Types of dividend payouts
  4. Conclusion
  5. Bibliography
  6. Appendixes

Dividend policy is one of the most important financial policies, not only form the viewpoint of the company, but also from that of the shareholders, the consumers, the workers, regulatory bodies and the Government. For a company, it is a pivotal policy around which other financial policies rotate. Value of the corporate securities depends to a great extent on dividend and, therefore, in deciding upon the financial structure of a company, dividend has to be assigned due consideration.
Once a company makes a profit, the board of directors must decide what to do with those profits. They could continue to retain the profits within the company, or they could pay out the profits to the owners of the firm in the form of dividends.
Once a company decides to pay dividends, there should be established a somewhat permanent dividend policy, which would impact on investors and perceptions of the company in the financial markets providing information concerning the firm's performance. The choice of the appropriate dividend policy depends on the preferences of investors and potential investors as well as on the company's capital structure and its future plans.
The board of directors holds a fiduciary position both with regard to the company as well as shareholders. The board of directors must combine the three decisions pertaining to investment, financing and dividends simultaneously as these three decisions are interrelated. Dividend policy decision influences the financing decision of the firm through retained earnings. Financing decision would relate to the amount of funds to be raised from external sources as the investment needs of a firm can be fulfilled by a combination of retained earnings and external financing. Therefore, higher the amount of retained earnings, given the investment needs, lower will be the need for external finance and vice-versa.

[...] Among the OECD countries, the Czech Republic and Iceland offer partial deductions for dividend payments made by companies, but no country allows full deduction. Individual tax relief There are far more countries that offer tax relief to individuals than to corporations. This tax relief can take either a form of the tax credit for taxes paid by corporations, or the lower tax rate on dividends. In the first case individuals can claim the taxes paid by the corporations as a tax credit when computing their own taxes. [...]

[...] As far as the stock price decreases, the current dividend policy could seem not satisfactory. Thus, let's analyze the alternative policy where initial dividend is higher than cash flow. 2nd Case Initial dividends are higher than cash flow Another policy is for Big Star Corporation to pay $22,000 of dividends immediately, which is $22 per share. As the firm's cash flow is only $20,000, the company will probably issue the extra $2,000 of bonds or stock in the current Year0. [...]

[...] cash dividend decision. If there is great stability, then the company can pay a stable, predictable dividend without adverse effects on the company's capital budgeting program, so that would suggest cash dividends rather than repurchases. On the other hand, if earnings and investment opportunities are unstable, this would suggest a policy of low regular dividends low payout ratio) together with a repurchase program under which a lot of shares are repurchased when there is excess cash and no repurchases when cash needs are great. [...]

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