Corporate payout policy (1).pptx

Corporate payout policy (1).pptx - Corporate payout policy...

Info icon This preview shows pages 1–11. Sign up to view the full content.

Corporate payout policy Finance II (COMM 122) – Sections 001-003 Winter 2018 Instructor: Evan Dudley
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Learning outcomes Understand the mechanics of dividends and share repurchases in order to compute the return to shareholders Differentiate between the different economic explanations for observed payout policies in order to formulate optimal payout policy
Image of page 2
Different types of dividends Many companies pay a regular cash dividend . Public companies often pay quarterly. Sometimes firms will throw in an extra cash dividend. The extreme case would be a liquidating dividend. Often companies will declare stock dividends. No cash leaves the firm. The firm increases the number of shares outstanding. Some companies declare a dividend in kind . Wrigley’s Gum sends around a box of chewing gum. Dundee Crematorium offers shareholders discounted cremations.
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Standard method of cash dividend payment Record Date - Person who owns stock on this date received the dividend. Ex-Dividend Date - Date that determines whether a stockholder is entitled to a dividend payment; anyone holding stock before this date is entitled to a dividend. Cash Dividend - Payment of cash by the firm to its shareholders.
Image of page 4
Procedure for cash dividend payment Monday, 27 Oct. Monday, 3 Nov. Tuesday, 4 Nov. Thursday, 6 Nov. Monday, 8 Dec. Declaratio n Date Cum- dividend Date Record Date Ex- dividend date Payment Date Declaration 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 : Buyers of the stock who purchase on this day are not entitled to the dividend Record Date : The corporation prepares a list of all individuals believed to be stockholders as of 6 November.
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Price behaviour 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 - div Ex- dividend Date The price drops by the amount of the cash dividend - t -2 -1 0 +1 +2 Taxes complicate things a bit. Empirically, the price drop is less than the dividend and occurs within the first few minutes of the ex-date.
Image of page 6
An Illustration of the irrelevance of dividend policy A compelling case can be made that dividend policy is irrelevant. Changing payout policy will not affect prices Investors can re-create their own “homemade”dividends
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

An illustration of the irrelevance of dividend policy Example: York Corporation , an all-equity firm At date 0, the managers are able to forecast cash flows perfectly. The firm will receive a cashflow of $10,000 at date 0 and $10,000 at date 1 The firm will dissolve at date 1. The firm has no additional positive NPV projects
Image of page 8
An illustration of the irrelevance of dividend policy (continued) I ) Current Policy : Dividends set equal to cashflow Dividends (Div.) at each date = $10000 The firm value will be : s r DIV DIV V 1 1 0 0 91 . 19090 $ 1 . 1 10000 $ 10000 $ 0 V
Image of page 9

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

An illustration of the irrelevance of dividend policy (continued)
Image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.
  • Winter '09
  • WANG
  • Dividend

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern