8. Interim Conclusion

The previous example has shown that under our strict set of assumptions, payout decisions are actually irrelevant:

  • It does not matter when the firm returns capital to the investors (smaller or larger initial dividend)
  • It does not matter how the firm returns capital to its shareholders (dividends or repurchases).

   

The reason for the first finding is that the financing decision that allows the firm to move dividend payments over time (borrow to pay extra dividend or reinvest retained capital) is value neutral (the expected return corresponds to the cost of capital). The reason for the second finding is that share repurchases and dividend payments have the same tax implications for shareholders (namely no taxes). 

 

If payout decisions matter (and they do matter in real life), it must be that some of the strict assumptions that we made are violated in reality. This will be the topic of the next sections.