FIN 010 Chapter Notes - Chapter 4: Dividend Policy, Retained Earnings, Investment
Document Summary
Since dividends are a measure of a company"s ability to produce profits, they influence the value of a company"s stock at present as well as in the future. Dividends also influence a company"s spending and funding plans, at least indirectly. For example, a corporation that insists on paying very large dividends may have less internal funds available to pay for new ventures or corporate growth, and will need external funding will alter its capital structure and capital costs. During the planning stage, financial administrators have to formulate a sensible dividend strategy. Finance has a theory of focusing on optimal dividend policies. One hypothesis (proposed by economists modigliani and miller) implies that dividend policy does not impact a company"s valuation. The rationale is as follows: since dividends are a deferred benefit they are not part of a firm"s investment decision and produce no earnings. Consequently, the cost of capital and the amount of earnings do not change as dividend policy changes.