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Dividend policy irrelevance

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  1. Introduction
  2. The factors affecting dividends payments
    1. The link between a firm's dividends policy and its life cycle stage
    2. The impact of the tax rate
    3. The corporate control effects
  3. The dividends policy irrelevance
    1. Conditions of validity
    2. A numerical demonstration of dividend policy irrelevance
  4. Conclusion
  5. References

Depending on its life cycle and strategy, a firm has different financial needs. These financial needs could be fulfilled by internal or external resources. The sources of internal financing is cash flows. External financing could be debt and/or equity. When a firm uses debt, the interest rate it pays is the remuneration of the lenders (i.e. banks). In the case of equity it is different, the firm does not have to pay a contractual interest rate. The shareholders' profit depends on the company's performance. This profit is determined by the gap between the amount they invested at a time period ?t? to get a given number of share ?X? and the value of these shares at a time period ?t+n?. A stockholder realizes a capital gain when the value of the shares he holds is higher than the value at which he has purchased them. A shareholder could also get dividends. A dividend is a payment in cash or in stocks made by a company to its stockholders.

[...] Figure Dividend Payout Ratios in G-7 Contries, 1982-84 and 1989-91 As one can see in figure Japan paid the lowest dividend in percentage of its earnings during the two periods considered, which is consistent with the previous proposition, because during these two periods Japan was the member of the G-7 with the highest expected growth rate The impact of the tax rate Dividend policy does not only depend on the stage of growth. Other factors such as tax treatment can affect the dividends policy. [...]

[...] The dividends policy irrelevance This proposition was initiated by Miller and Modigliani[4]. It argues that dividend payout is irrelevant and that shareholders are indifferent about having dividends. But this argument is valid under some assumptions: 1. Conditions of validity The theory is as follows, if a firm pays dividends, it will impact negatively its stock price. As a consequence, a stockholder is indifferent about receiving dividend, because what he wins on one hand, he loses it on the other. This is true if: Dividends and the gains from stock selling have an identical tax rate or if there are no taxes. [...]

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