The Dividend Principle

Most businesses would undoubtedly like to have unlimited investment opportunities that yield returns exceeding their hurdle rates, but all businesses grow and mature. As a consequence, every business that thrives reaches a stage in its life when the cash flows generated by existing investments is greater than the funds needed to take on good investments. At that point, this business has to figure out ways to return the excess cash to owners. In private businesses, this may just involve the owner withdrawing a portion of his or her funds from the business. In a publicly traded corporation, this will involve either dividends or the buying back of stock. In chapter 10, we introduce the basic trade off that determines whether cash should be left in a business or taken out of it.

For stockholders in publicly traded firms, we will note that this decision is fundamentally one of whether they trust the managers of the firms with their cash, and much of this trust is based upon how well these managers have invested funds in the past. In chapter 11, we consider the options available to a firm to return assets to its owners - dividends, stock buybacks and spin offs - and investigate how to pick between these options.

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Responses

  • yasmin
    What is a dividend principle?
    8 years ago

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