fin mang test #3 section #3

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fin mang test #3 section #3
2010-12-06 22:12:18
finance test section on theories

finance test #3 section on 5 theories
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  1. clientele effect theory
    in a perfect market a manager can buy more stocks with "excess cash" created by dividend or sell a portion of stock "creating a dividend" but have brokerage fees (selling/buying stock isn't free)
  2. if they have a preference between dividends and capital gains we'd expect them to
    invest in firms that have a dividend policy consistent with these preferences
  3. residual dividend theory
    company's dividend payment should = the cash left after financing al the investments that have positive net present valeus
  4. in residual theory dividend policy is influences by 2 things
    • 1. company's investment opportunities
    • 2. availability of internally generated capital...dividend policy is passive in nature and can't affect market price of CS
  5. Information effect theory
    evidence shows that large, unexpected change in dividends can have a significant impact on the stock prices-- dividend policy seen as a signal about firms financial condition
  6. Agency Costs theory
    costs (i.e. reduced stock price) associated with potential conflict between managers and investors when two groups aren't the same- dividends may make a meaningful contribution to the firm's value
  7. in agency costs dividend policy may
    be perceived as a tool to minimize agency costs
  8. Expectations Theory:
    market reaction doesn't only reflect response to firm's actions, but also indicates investor's expectations about the ultimate decision to be made by management
  9. in expectations theory you want
    dividend expected by shareholders and the actual amount of dividend paid to be same (market price of stock will remain unchanged)