A Model of Optimal Dividend Policy to Maximize Shareholder Wealth:

When Taxes are Considered

Tor Brunzell¹, Sören Holm², Bengt Jonsson² 
(1. Stockholm Business School, Stockholm University, Sweden; 2. Swedish University of Agricultural Sciences, Umeå, Sweden)

Abstract: The article analyzes theoretically how a firm maximizes the value of shareholder’s wealth with its dividend policy. Corporate dividend policy is one of the major puzzles with modern finance. The overall question is whether company should pay out dividend at all. However, the large majority of listed companies pay dividend and they also carry sophisticated dividend policies. In this paper we outline when it is optimal for a company to pay out dividend and when it should reinvest the profit from operations. The model takes taxes in to consideration estimating the value of a company, i.e., the present value after deduction for taxes, is used as objective function. Four different taxes are considered. The analysis shows the terms on which it is profitable to receive dividend payout or to reinvest at an arbitrary time. Under the assumption of a unique maximum net present value, the terms at the time for the maximum net present value are also presented.

Key words: dividend; financing; management; reinvestment; taxes

JEL code: C61, E62, G31, G35