Why Does It Matter?
Declaration date - the board of directors declares a dividend payment that
will be made on March 14.
Ex-dividend date - the shares trade ex dividend on and after this date.
before this date receive the dividend.
Purchasers on or after this date do not
receive the dividend.
Record date - the declared dividends are distributable to shareholders of
record on this date.
Payable date - the checks are mailed.
If the dividend is declared, the price of the stock will drop on the ex-dividend date
by the value of the dividend, $5.
It will then trade for $95.
If it is not declared, the price will remain at $100.
Mann’s outflows for investments are $2,000,000.
These outflows occur
One year from now, the firm will realize $1,000,000 in net income
and it will pay $500,000 in dividends. Since the only immediate financing need is
for the investments, Mann must finance $2,000,000 through the sale of shares worth
It must sell $2,000,000 / $100 = 20,000 shares.
The MM model is not realistic since it does not account for taxes, brokerage fees,
uncertainty over future cash flows, investors’ preferences, signaling effects, and
The ex-dividend date is Jan. 30, which is two business days before the record date.
The stock price should drop by $1.25 on the ex-dividend date.
Knowing that share price can be expressed as the present value of expected future
dividends does not make dividend policy relevant.
Under the growing perpetuity model, if
overall corporate cash flows are unchanged, then a change in dividend policy only changes
the timing of the dividends.
The PV of those dividends is the same.
This is true because,
given that future earnings are held constant, dividend policy simply represents a transfer
between current and future stockholders.
In a more realistic context and assuming a finite holding period, the value of the shares
should represent the future stock price as well as the dividends.
Any cash flow not paid as
a dividend will be reflected in the future stock price.
As such the PV of the flows will not
change with shifts in dividend policy; dividend policy is still irrelevant.
The price is the PV of the dividends,
The current value of your shares is ($15)(500) = $7,500.
The annuity you receive
You desire $4,613.3721 each year.
You will receive $1,000 in dividends in the first
year, so you must sell enough shares to generate $3,613.3721.
price at which you will sell your shares is the PV of the liquidating dividend,
$17.5375 / 1.15 = $15.25, so you must sell 236.942 shares.
The remaining shares
will each earn the liquidating dividend.
At the end of the second year, you will
receive $4,613.38 [= (500 - 236.942) x $17.5375].
(rounding causes the