Define each of the following terms: a. Optimal distribution policy b. Dividend irrelevance theory; bird-in-the-hand theory; tax
Question:
Define each of the following terms:
a. Optimal distribution policy
b. Dividend irrelevance theory; bird-in-the-hand theory; tax effect theory
c. Information content, or signaling, hypothesis; clientele effect
d. Residual distribution model; extra dividend
e. Declaration date; holder-of-record date; ex-dividend date; payment date
f. Dividend reinvestment plan (DRIP)
g. Stock split; stock dividend; stock repurchase
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a Optimal distribution policy refers to the strategy adopted by a company to determine the best way to distribute its profits among shareholders This involves finding a balance between paying dividends and retaining earnings for future growth b Dividend Irrelevance Theory This theory proposed by Modigliani and Miller suggests that the value of a firm is not affected by its dividend policy Investors are indifferent between receiving dividends and capital gains assuming perfect markets BirdintheHand Theory This theory suggests that investors prefer to receive dividends rather than future capital gains It argues that the certainty of receiving a dividend the bird in the hand is more valuable than the uncertain future capital gains Tax Effect Theory This theory considers the impact of taxes on investor preferences for dividends It suggests that investors may prefer companies that offer taxfavored dividends taking into account the tax implications of dividend income compared to capital gains c Information Content Hypothesis or Signaling Hypothesis This hypothesis proposes that the level of dividends conveys information about a companys future prospects A higher dividend can signal positive expectations while a lower dividend may signal challenges or conservative management Clientele Effect The clientele effect suggests that companies attract a certain group of investors based on their dividend policy For example if a company consistently pays high dividends it may attract incomeseeking investors forming a clientele with specific preferences d Residual Distribution Model This model involves distributing dividends based on what remains residual after funding all positive net present value projects and meeting other financial obligations It aims to maximize shareholder wealth by allocating funds efficiently Extra Dividend An extra dividend is a onetime payment to shareholders that is not part of the regular dividend schedule It is often declared when a company has excess cash or wants to distribute special earnings e Declaration Date The declaration date is when a companys board of directors announces the intention to pay a dividend The company declares the amount of the dividend and the date of payment HolderofRecord Date This is the date on which a shareholder must officially own shares to be entitled to a declared dividend Shareholders recorded on this date will receive the dividend ExDividend Date The exdividend date is typically two business days before the holderofrecord date Investors who purchase shares on or after the exdividend date are not eligible to receive the upcoming dividend ...View the full answer
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Related Book For
Financial management theory and practice
ISBN: 978-1439078099
13th edition
Authors: Eugene F. Brigham and Michael C. Ehrhardt
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