MAC3761 LU20: THE DIVIDEND DECISION
What are the two aspects of shareholder returns?
Dividends &
Capital Growth
What are the 3 Divergent Dividend Theories?
1. Dividend Irrelevance theory(Modigliani and Miller)
2.Bird-in-hand theory
3.Tax Preference Theory
What is the Miller and Modigliani Theory of Irrelevance?
Dividend policy of co is irrelevant to the value of the firm
Sh's can create, increase or reduce their 'dividend' through selling or buying shares
What is the Bird-in-Hand theory?
Dividend Policy of a co is relevant to the value of the firm
Current certain dividends are preferred by investors over uncertain future capital
growth
What is the Tax-Preference Theory?
Dividend Policy of co is relevant to value of firm
Higher dividend payouts reduce sh value when dividends are taxed at a higher rate
than capital growth
How does the constant dividend/earnings policy treat dividends?
Pays sh's a dividend which is calculated at a constant percentage of earnings
How does the Residual dividend policy treat dividends?
Dividend paid after taking into account:
-capital expenditure that investments require and
-other working capital requirements and
-other operational needs
paid on residual amount of equity generated after firms’ current financial
obligations have been met
How does the Zero Payout policy treat dividends?
, -Firms may not pay dividends due to:
-insufficient profits or;
-as voluntary choice and prefer alternative forms of distribution to shareholders
What are the three types of dividend payments(in terms of timing) that are
common in South Africa?
-Interim Dividend
-Final Dividend
-Special Dividend
What is the interim Dividend?
-Normally declared in the middle of accounting reporting period when interim
results are issued
How does the JSE define an interim dividend?
a dividend after a reporting period e.g. 6montly
What is the Final Dividend?
Declared at the end of the accounting period when final annual results are issued
How does the JSE define the final dividend?
a Dividend declared for the financial year-end
What is the Special Dividend?
Issued over and above final dividend payment
How does the JSE define the Special dividend?
a dividend declared for the interim or financial year-end, over and above the
normal dividend
In what situation is a liquidation dividend paid?
Paid when a company is wound up
To whom is the liquidation dividend paid?
Paid to registered shareholders
What are the timing considerations for a liquidation dividend?
Can be paid as either interim or final liquidation payment
What are the two aspects of shareholder returns?
Dividends &
Capital Growth
What are the 3 Divergent Dividend Theories?
1. Dividend Irrelevance theory(Modigliani and Miller)
2.Bird-in-hand theory
3.Tax Preference Theory
What is the Miller and Modigliani Theory of Irrelevance?
Dividend policy of co is irrelevant to the value of the firm
Sh's can create, increase or reduce their 'dividend' through selling or buying shares
What is the Bird-in-Hand theory?
Dividend Policy of a co is relevant to the value of the firm
Current certain dividends are preferred by investors over uncertain future capital
growth
What is the Tax-Preference Theory?
Dividend Policy of co is relevant to value of firm
Higher dividend payouts reduce sh value when dividends are taxed at a higher rate
than capital growth
How does the constant dividend/earnings policy treat dividends?
Pays sh's a dividend which is calculated at a constant percentage of earnings
How does the Residual dividend policy treat dividends?
Dividend paid after taking into account:
-capital expenditure that investments require and
-other working capital requirements and
-other operational needs
paid on residual amount of equity generated after firms’ current financial
obligations have been met
How does the Zero Payout policy treat dividends?
, -Firms may not pay dividends due to:
-insufficient profits or;
-as voluntary choice and prefer alternative forms of distribution to shareholders
What are the three types of dividend payments(in terms of timing) that are
common in South Africa?
-Interim Dividend
-Final Dividend
-Special Dividend
What is the interim Dividend?
-Normally declared in the middle of accounting reporting period when interim
results are issued
How does the JSE define an interim dividend?
a dividend after a reporting period e.g. 6montly
What is the Final Dividend?
Declared at the end of the accounting period when final annual results are issued
How does the JSE define the final dividend?
a Dividend declared for the financial year-end
What is the Special Dividend?
Issued over and above final dividend payment
How does the JSE define the Special dividend?
a dividend declared for the interim or financial year-end, over and above the
normal dividend
In what situation is a liquidation dividend paid?
Paid when a company is wound up
To whom is the liquidation dividend paid?
Paid to registered shareholders
What are the timing considerations for a liquidation dividend?
Can be paid as either interim or final liquidation payment
