DIVIDEND POLICY:

Theoretical and real world models:

Dividend policy is discretionary,  That is, the amount of the
quarterly dividends is determined by the board of directors.  
The criteria for determining dividends should be "what policy
will maximize the stock price?"
Accounting:  EAC is split into to dividends & Retained Earnings.  

1.  Modigliani & Miller says that dividends don't matter, 
"dividends are irrelevant", that stock price determined 
by "basic earning power [ROA] of firm"  MM acknowledge
signaling effect & clientele theory.

2.  Gordon & Lintner says dividends are everything, that
investors have a preference for liquidity.  MM call this
the "Bird in the hand theory".
P0=D1/(ke-g) .  

3.  Harkavy did empirical test to find a slight positive
correlation between payout ratios and stock price.  Both MM
and Gordon/Lintner claim that Hakavey's study lends credibility
to their respective theories.

4.  Walter's theory of Residuals:  Walters posited that firms
should use EAC to fund projects whose IRR* are expected to be 
greater than the stockholders required rate of return.  Dollars 
not expended on these projects should be paid out to stockholders 
in the form of dividends.  

Realworld models:

5.  Constant dollars:  Pay out same amount every quarter.
6.   "" with kicker:  Add a bonus every now and then.
7.  Constant increases:  Increase $ amount every quarter.
8.  Constant payout ratio: Hold (div/EAC) constant each quarter.
9.  tied to CPI (the Norton story):  Increase div by cost of living.