tailieunhanh - Brealey−Meyers: Principles of Corporate Finance, 7th Edition - Chapter 16

CHAPTER SIXTEEN THE DIVIDEND CONTROVERSY We explain how companies set their dividend payments and we discuss the controversial question of how dividend policy affects the market value of the firm. The first step toward understanding dividend policy is to recognize | Brealey-Meyers V. Dividend Policy and 16. The Dividend The McGraw-Hill Principles of Corporate Capital Structure Controversy Companies 2003 Finance Seventh Edition Brealey-Meyers Principles of Corporate Finance Seventh Edition V. Dividend Policy and Capital Structure 16. The Dividend Controversy The McGraw-Hill Companies 2003 IN THIS CHAPTER we explain how companies set their dividend payments and we discuss the controversial question of how dividend policy affects the market value of the firm. The first step toward understanding dividend policy is to recognize that the phrase means different things to different people. Therefore we must start by defining what we mean by it. A firm s decisions about dividends are often mixed up with other financing and investment decisions. Some firms pay low dividends because management is optimistic about the firm s future and wishes to retain earnings for expansion. In this case the dividend is a by-product of the firm s capital budgeting decision. Suppose however that the future opportunities evaporate that a dividend increase is announced and that the stock price falls. How do we separate the impact of the dividend increase from the impact of investors disappointment at the lost growth opportunities Another firm might finance capital expenditures largely by borrowing. This releases cash for dividends. In this case the firm s dividend is a by-product of the borrowing decision. We must isolate dividend policy from other problems of financial management. The precise question we should ask is What is the effect of a change in cash dividends paid given the firm s capital budgeting and borrowing decisions Of course the cash used to finance a dividend increase has to come from somewhere. If we fix the firm s investment outlays and borrowing there is only one possible source an issue of stock. Thus we define dividend policy as the trade-off between retaining earnings on the one hand and paying out cash and issuing new shares on the .