fin test #3 section #2

• dividend policy is irrelevant
• high dividends increase share prices
• low dividends increase share prices

irrelevant implies shareholder wealth isn't affected by dividend policy whether the firm pays o% or 100% of its earnings as dividends

perfect capital markets (study dividends in isolation i.e. no costs, no bankruptcies, conflicts)

firm's investment and borrowing decisions have been made and won't be altered by dividend payment

there isn't a relationship between dividend policy and stock value

• based on bird-in-the-hand theory- investors may prefer "dividend today" as it is less risky compared to uncertain future capital gains"
• -higher RR for discounting a dollar of capital gain than dollar of dividends

managers ca control dividends but can't dictate the price of stock

dividends actually hurt investors based on the difference in tax treatment of dividends versus capital gains

taxes whenever possible

possibly sell at premium relative to stocks that require current taxation

• low dividends
• high capital gains

• high dividends
• low capital gains

low dividends are advantageous and high dividends are hurtful