FNCE 90018 Corporate Financial Policy Notes

1 Found helpful • 12 Pages • Topic Notes • Year: Pre-2021

1. two methods to distribute earnings to shareholders , the two methods of distributing cash would be virtually identical 2.M&M Dividend Irrelevance Theory: assumption -Dividends -Share repurchases Without taxes and transaction costs investment plan that is unaffected by the dividend decision -Company has a set - information costs. -Rational investors who are indifferent between receiving dividends or capital gains (since no taxes). 3. dividends roles Can associated with capital gain by selling share immediately. ii. Shareholders preference for current income need cash, but do not want sell shares Therefore, , the lower the expected level of dividends. iv. Information content of dividends and information asymmetry decrease dividend- bad signals; v. Agency Costs less cash, reduce the agency problems; need more external funds-better to monitor and use the money more efficiently. Assume then; tp: personal tax rate; tc: corporate tax rate if tp < tc prefer dividends (effectively paying tax at personal rate) if tp > tc prefer capital gains (effectively paying tax at company rate) Assume Capital Gains Tax > 0 then; if tp < tc prefer dividends (effectively paying tax at personal rate) if tp > tc may prefer dividends (As capital gains subject to double taxation)

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