F|N2101 Business financeⅢ
FIN2101 Business Finance II
Module 10 Dividend Policy
Module 10 Dividend Policy
Student Activiries Reading Text, Chapter 12 Text Study Guide, Chapter 12 Study Book, Module 10 Appendix 10.1, 10.2 and 10.3 Tutorial Activities Tutorial Workbook, Self Assessment Activity 10.1 Text Study Guide, Chapter 11, All
Student Activities Reading ▪ Text, Chapter 12 ▪ Text Study Guide, Chapter 12 ▪ Study Book, Module 10 ▪ Appendix 10.1, 10.2 and 10.3 Tutorial Activities ▪ Tutorial Workbook, Self Assessment Activity 10.1 ▪ Text Study Guide, Chapter 11, All
Cash dividends Typically semi-annual in Australia Interim dividend paid after the end of the first half of the year, and a final dividend usually paid after the AGM Can only be paid out of current or accumulated profIts. Cannot be paid out of capital or if it Would make the company insolvent
Cash Dividends ▪ Typically semi-annual in Australia. ▪ Interim dividend paid after the end of the first half of the year, and a final dividend usually paid after the AGM. ▪ Can only be paid out of current or accumulated profits. ▪ Cannot be paid out of capital or if it would make the company insolvent
Payment Procedures Announcement date Declaration date Date of record EX-dividend date Payment date
Payment Procedures ▪ Announcement date ▪ Declaration date ▪ Date of record ▪ Ex-dividend date ▪ Payment date
Payment Procedures 2 3 5 EX-dividend period 1 Announcement date 2 Declaration date 3 EX-dividend date 4 Date of record 5 Payment date
Payment Procedures 1 2 3 4 1 Announcement date 2 Declaration date 3 Ex-dividend date 4 Date of record 5 Payment date 5 Ex-dividend period
Three Approaches Dividend policy cannot affect shareholders wealth in a perfect capital market and is therefore irrelevant High dividends are best- relevant Low dividends are best- relevant
Three Approaches ▪ Dividend policy cannot affect shareholders’ wealth in a perfect capital market and is therefore irrelevant. ▪ High dividends are best - relevant. ▪ Low dividends are best - relevant
Relevance Argument Resolution of uncertainty-the 'bird-in- the-hand' argument/fallacy Information content of dividend announcements- signalling
Relevance Argument ▪ Resolution of uncertainty - the ‘bird-inthe-hand’ argument/fallacy. ▪ Information content of dividend announcements – signalling
Relevance Argument Clientele effect tax investors' preferences
Relevance Argument ▪ Clientele effect –tax –investors’ preferences
Relevance Argument Agency costs can be reduced by paying higher dividends Issue costs will be minimised if the firm pays lower dividends Shareholders transaction costs will be higher, the lower the dividend
Relevance Argument ▪ Agency costs can be reduced by paying higher dividends. ▪ Issue costs will be minimised if the firm pays lower dividends. ▪ Shareholders’ transaction costs will be higher, the lower the dividend
