Introduction to Corporate Finance

15: Payout Policy

mini case

After working for the past four years as a financial analyst

for Nevada Power Corporation, you receive a well-deserved

promotion. You have been appointed to work on special

projects for Mr Watkins, the chief financial officer (CFO).

Your first assignment is to gather information on dividend

theory and policy, because the CFO wants to reassess the

company’s current dividend policy.

ASSIGNMENT

1 What are the different types of dividend policies?

Provide examples of situations in which each of these

dividend policies could be used.

2 Describe the difference between cash dividends, bonus

share issues, share splits and share repurchases. Provide

examples of when each of these forms of dividends can

be used.

3 Discuss the theory of dividend irrelevance. How do

taxes affect the dividend irrelevance theory?

4 How do managers use dividend policy to convey

information to the marketplace? Why is dividend

policy, instead of a press release, used to communicate

information?

DIVIDEND POLICY

ONLINE STUDY TOOLS

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tools for this chapter. The CourseMate website

contains:

Smart concepts – step-by-step explanations of

concepts

» See what dividend irrelevance means in

a world with perfect capital markets.

Smart solutions – step-by-step explanations of

problems

Smart videos

» Scott Lee, Texas A&M University

» Andy Bryant, Executive Vice President

of Finance and Enterprise Systems,

Chief Financial Officer, Intel Corp.

» John Graham, Duke University

» Cynthia Lucchese, Chief Financial

Officer, Hillenbrand Industries

» Frank Popoff, Chairman of the Board

(retired), Dow Chemical

» Kenneth Eades, University of Virginia

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