Chap016(WW-FIN357ALT)SPR07

Chap016(WW-FIN357ALT)SPR07 - 16-1Chapter Outline16.1...

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Unformatted text preview: 16-1Chapter Outline16.1 Different Types of Dividends16.2 Standard Method of Cash Dividend Payment16.3 Dividend Policy Theories16.4 Repurchase of Stock16.5 Personal Taxes, Issuance Costs, and Dividends16.6 Real World Factors a Particular Dividend Policy16.7 The Residual Model of Dividends16.8 What We Know and Do Not Know About Dividend Policy16.9 Summary and Conclusions16-216.1 Different Types of Dividends•Many companies pay a regular cash dividend.•Companies may declare stock dividends.•Some companies declare a dividend in kind.16-316.2 Standard Method of Cash Dividend PaymentRecord Date- Person who owns stock on this date receives the dividend.Ex-Dividend Date- Date that determines whether a stockholder is entitled to a dividend payment; anyone holdingstock before this date is entitled to a dividend.Cash Dividend- Payment of cash by the firm to its shareholders.16-4Procedure for Cash Dividend PaymentDeclaration Date:The Board of Directors declares a payment of dividends.Cum-Dividend Date:The last day that the buyer of a stock is entitled to the dividend. Ex-Dividend Date:The seller of a stock is entitled to the dividend. Record Date:The corporation prepares a list of all individuals believed to be stockholders as of this date.16-5Procedure for Cash Dividend Payment25 Oct.Friday Oct. 31Monday Nov. 3Wednesday Nov. 5Friday Dec. 7Declaration DateCum-dividend DateEx-dividend DateRecord DatePayment Date…16-6Price Behavior around the Ex-Dividend Date•In a perfect world, the stock price will fall by the amount of the dividend on the ex-dividend date.$P$P - divEx-dividend DateThe price drops by the amount of the cash dividend-t…-2-1+1+2…Taxes complicate things. Empirically, the price drop is less than the dividend and occurs within the first few minutes of the ex-date.16-716.3 What is “Dividend Policy”?•The decision to pay out earnings versus retaining and reinvesting them. Includes these elements:1. High or low payout?2. Stable or irregular dividends?3. How frequent?4. Do we announce the policy?16-8Do investors prefer high or low payouts? •Dividends are irrelevant: Investors don’t care about payout (M&M).•Bird-in-the-hand: Investors prefer a high payout.•Tax preference: Investors prefer a low payout, hence growth.3 theories:16-9Dividend Irrelevance (M&M)•Modigliani & Miller make a compelling case that dividend policyis irrelevant.•Investors can easily convert shares to cash, so they will not pay higher prices for firms with higher dividend payouts. •Dividend policy will has no impact on the value of the firm because investors can create any income stream they want using homemade dividends.16-10Dividend Irrelevance Theory•Investors are indifferentbetween dividends and retention-generated capital gains....
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This note was uploaded on 05/10/2008 for the course FIN 357 taught by Professor Hadaway during the Spring '06 term at University of Texas at Austin.

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Chap016(WW-FIN357ALT)SPR07 - 16-1Chapter Outline16.1...

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