1. Dividend Policy Question: Benartzi et al. (1997, p. 1032) conclude, “Lintner’s model of dividends remains...

1. Dividend Policy Question: Benartzi et al. (1997, p. 1032) conclude, “Lintner’s model of dividends remains the best description of the dividend setting process available.”

a) Describe the Lintner’s model of dividends. [8 Marks]

b) Describe the major differences between residual dividend theory and managed dividend policy.

Solutions

Expert Solution

a) According to Jhon Lintner who was the founder of this theory, he has taken several interviews of corporate and he observed that the corporates generally sets a long run target payout ratio.

His theory states that Dividend generally follows the Earnings, but dividend follow smoother path then earnings.

The Lintners policy has 2 parameters, one is the Target Payout ratio and the other is the adjustment of dividend according to that target.

Linter expressed the Corporate dividend behaviour in the following model:

D1 = D0 + [(EPS * TARGET PAYOUT) - D0] * Af

Where, D1 is the Expected dividend which will be paid by company

D0 is the present dividend paid

EPS is earning per share

Target payout is the payout from the EPS

Af is the Adjusting factors.

B) Residual Dividend policy is based on the concept of leftover or Excess income after considering all the investment. This theory is very simple. It states that the firm should give dividend from its earning after considering all the investment that the firm is going to do in current year. After allocating the profits to that investment is the firm has any leftover profit it will distribute as dividend. It is also known as unmanaged dividend policy.

Managed Dividend policy is something that is planned from the beggining by the firm. If the firm follows some policies on it dividend distribution and pay dividend as per the policies that is the managed dividend policy. The firm can pay a fixed percentage of its Earning or it can take help of various theries for its Dividend policy.

jeff jeffy answered 1 year ago

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