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Student Centre Foundations of Financial Management
Fifth Canadian Edition

Student Centre

Chapter 18: Dividend Policy and Retained Earnings

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    clientele effect: The effect of investor preferences for dividends or capital gains. Investors tend to purchase securities that meet their needs.

    corporate life cycle: See life cycle curve: A curve illustrating the growth phases of a firm. The dividend policy most likely to be employed during each phase is often illustrated.

    dividend payment date: The day on which a shareholder of record will receive his or her dividend.

    dividend record date: Shareholders owning the stock on the holder-of-record date are entitled to receive a dividend. To be listed as an owner on the corporate books, the investor must have bought the stock before it went ex-dividend.

    dividend reinvestment plans: Plans that provide the investor with an opportunity to buy additional shares of stock with the cash dividends paid by the company.

    dividend tax credit: Tax credit accorded to individuals receiving corporate dividends. Its purpose is to compensate for the fact that corporate earnings are taxed in the hands of the corporation and possibly again in the hands of the shareholder.

    dividend yield: Dividends per share divided by market price per share. Dividend yield indicates the percentage return that a shareholder will receive on dividends alone.

    ex-dividend date: Two business days before the holder-of-record date. On the ex-dividend date the purchase of the stock no longer carries with it the right to receive the dividend previously declared.

    homemade dividend: Cash-payment-like dividend determined by an investor by selling a portion of the investor's share holdings.

    information content: See dividend information content: This theory of dividends assumes that dividends provide information about the financial health and economic expectations of the company. If this is true, corporations must actively manage their dividends to provide the market with information.

    liquidating dividend: A final payment made to shareholders when a corporation is wound up or liquidated.

    marginal principle of retained earnings: The corporation must be able to earn a higher return on its retained earnings than a shareholder would receive after paying taxes on the distributed dividends.

    payout ratio: See dividend payout: The day on which a shareholder of record will receive his or her dividend.

    residual theory of dividends: This theory of dividend payout states a corporation will retain as much earnings as it may profitably invest. If any income is left after investments, the firm will pay dividends. This theory assumes that dividends are a passive decision variable.

    stock dividend: A dividend paid in stock, rather than cash. A book transfer equal to the market value of the stock dividend is made from retained earnings to the capital stock. The stock dividend may be symbolic of corporate growth, but it does not increase the total value of the shareholders' wealth.

    stock repurchase: A corporate initiative to buy back its own shares. This decreases the number of shares outstanding.

    stock split: A division of shares by a ratio set by the board of directors-2 for 1, 3 for 1, 3 for 2, and so on. Stock splits usually indicate that the company's stock has risen in price to a level that the directors believe limits the trading appeal of the stock. The par value is divided by the ratio set, and the new shares are issued to the current shareholders of record to increase their shares to the stated level. For example, a two-for-one split would increase your holdings from one share to two shares.


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