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page integrated mini-case Investor Perceptions of Dividend Growth Your firm currently pays a quarterly chvidend ofSI.35. You are planning on doubbng this dividnd but then keeping it flat for the next three years. after which it is expected to increase at the industry standard rate of percent per year indefinitely. Your required rate of return on your company's stock is 12.5 percent, and the last Sl 35 dividend just paid What will be the time value of money impact on your stock price investors are fully informed conceming your future intentions for all dividends? What will be the present value of all expected future dividends if you don't tell the that you wil be keeping the quarterly idend constant for the first three years. and they assume after the fifth coming dividend that dividends will remain at S2.70 indefinitely? 17-1 17-2 17-3 11-5 17_6 17-7 17_8 17-9 ANSWERS TO TIME OUT Increasing the dividend payout ratio wil reduce the amount of retained earnings, which therefore reduces the amount of money that can be mested in projects that would cause future earnings (and dividends) to grow No. Having to pay trading costs when selling shares would cause investors to increase their preference for dividends. which don't involve trading costs. Investors who need a stable payment stream over time and for whom the tax burden of dividends wouldn't be very large prefer dividends over capital gains. The typical example of this is a retiree. Raising a firm's dividend payout ratio might be seen as a negative signal if investors interpret it as indicating that the firm has run Out Of good investment opportunities In general. a firm would increase payout ratio if earnings became more stable or if commitments on earnings (such as future investments in projects) decrease A firm wh cyclical sales would be more likely to use extraordinary dividends. as it would be unwilling to commit to a higher, fixed dividend amount. A firm Sets the ex-dividend date one month advance Of the dividend payment date to give itself plenty Of time to determine the Owner Of record for each Share and to provide ample processhg time between determining owners Of record and actually mailing the Checks, Stock prices would peak higher, following the blue path shown in Figure 17.5. It would be more to Stockholders' advantage for the firm to pay a Stock dividend. as this would give Shareholders more Shares while the par value Of each Share Constant, 17-10 The Shareholders Who do not Will See their equity Stake Stay Constant on a dollar basis. but that Constant dollar amount Win represent a larger proportion Of the firm'S equity because the Shareholders Who do are taking their money out Of the firm, elements: ArrOWS; Images: _human/Getty VVhtJe: OevonyuJGetty