rgued that dividend policy is irrelevant for shareholder value and cash flow. With a no-dividend policy, the current price is and will remain $100.00 per share. With a high-dividend policy, the current price is $100.00 per share and the value falls to $95 per share upon payment of the dividend.

rgued that dividend policy is irrelevant for shareholder value and cash flow. With a no-dividend policy, the current price is and will remain $100.00 per share. With a high-dividend policy, the current price is $100.00 per share and the value falls to $95 per share upon payment of the dividend.

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter11: Risk-adjusted Expected Rates Of Return And The Dividends Valuation Approach

Section: Chapter Questions

Problem 8QE

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Question

In a world without taxes or transaction costs, it can be argued that dividend policy is irrelevant for shareholder value and cash flow. With a no-dividend policy, the current price is and will remain $100.00 per share. With a high-dividend policy, the current price is $100.00 per share and the value falls to $95 per share upon payment of the dividend.

Use the following example to demonstrate dividend policy irrelevance.

No-dividend Policy	High-dividend Policy
5,000 shares owned	5,000 shares owned
$100.00 current price per share	$100.00 current price per share
$0.00 dividends per share	$5.00 dividends per share
$25,000 desired cash flow per year	$25,000 desired cash flow per year

Definition Definition Net amount of cash that an entity receives and expends over the course of a given period. For a business to continue operating, positive cash flows are required, and they are also necessary to produce value for investors. Investors in particular prefer to see growing cash flows even after capital expenditures have been paid for (which is known as free cash flow).

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