fin test #3 section #2

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fin test #3 section #2
2010-12-06 21:51:48
finance test section on three views

finance test #3 section on three views section #2
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  1. what are the three views:
    • dividend policy is irrelevant
    • high dividends increase share prices
    • low dividends increase share prices
  2. view #1 (MM's indifferent theory/irrelevant theory)
    irrelevant implies shareholder wealth isn't affected by dividend policy whether the firm pays o% or 100% of its earnings as dividends
  3. view #1 is based on 2 assumptions
    perfect capital markets (study dividends in isolation i.e. no costs, no bankruptcies, conflicts)

    firm's investment and borrowing decisions have been made and won't be altered by dividend payment
  4. with the 2 assumptions you conclude
    there isn't a relationship between dividend policy and stock value
  5. View #2
    • based on bird-in-the-hand theory- investors may prefer "dividend today" as it is less risky compared to uncertain future capital gains"
    • -higher RR for discounting a dollar of capital gain than dollar of dividends

    managers ca control dividends but can't dictate the price of stock
  6. view #3
    dividends actually hurt investors based on the difference in tax treatment of dividends versus capital gains
  7. investors try to defer....
    taxes whenever possible
  8. stocks that allow tax deferral will
    possibly sell at premium relative to stocks that require current taxation
  9. tax deferral
    • low dividends
    • high capital gains
  10. current taxation
    • high dividends
    • low capital gains
  11. in conclusion this theory believes
    low dividends are advantageous and high dividends are hurtful