0321286618_13 - Chapter 13 Dividend Policy Instructors...

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Unformatted text preview: Chapter 13 Dividend Policy Instructors Resources Overview Chapter 13 concentrates on the dividend decision from the viewpoint of both the firm and the investors. The types of dividend policies, forms of dividends, and their possible effects on the value of the firm are included in this chapter. The arguments for the relevancy and irrelevancy of dividends are presented. The legal, contractual and internal constraints affecting dividend policy are discussed. An introduction to dividend reinvestment plans is included. Study Guide The following Study Guide examples are suggested for classroom presentation: 80 Part 4 Long-Term Financial Decisions Example Topic Chapter 13 Dividend Policy 81 1 Dividend policy 82 Part 4 Long-Term Financial Decisions Suggested Answer to Chapter Opening Critical Thinking Question Microsofts press release says that it will return up to $75 billion to shareholders over a four year period including $14 billion in regular dividends ($3.5 billion per year), $32 billion for the special dividend, and $30 billion in stock buybacks. As you read this chapter ponder this question: From the shareholders viewpoint, what value have they received from each of the three planned cash disbursements? Lets take each case separately. Regular dividends: Regular dividends are seen as evidence that a company is financially strong and able to meet its commitment. While new companies often forego dividend payouts in favor of reinvesting internally for growth, most shareholders expect the eventual payment of dividends as a way of getting a concrete return on investments without selling their shareholdings. When a stock goes ex-dividend, the share price usually drops in an amount equivalent to the dividend payment. Thus, the $14 billion in dividend payments will incrementally drop the stock price at the time of the dividend payments, but does not mean that the net price of all of Microsofts outstanding stock will decrease by $14 billion because over the course of 4 years, barring some unforeseen corporate event, the stock price will have more to do with corporate earnings reports and the vagaries of the stock market. Special Dividend: This is a significant event which is expected to lower the share price by the equivalent value of the per share payout. The shareholder will have to pay taxes on the dividend when it is received (unless the share is held in a qualified retirement plan). In the absence of other events, the wealth of the shareholder will decrease by the amount of the taxes paid on the special dividend. Stock buyback: A stock buyback is often seen as a sign that a stock is undervalued and can lead to increased investment interest in the stock. For the shareholder, a stock buyback will increase the percentage of stock ownership of the individual shareholder in a miniscule amount. However, that increased ownership is offset by the reduction in cash assets used to buy back the companys stock. The short-term result should not be significant, but in the long run, future corporate earnings will be split...
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This note was uploaded on 11/09/2009 for the course FINANCE 330 taught by Professor Seri during the Spring '09 term at Birzeit University.

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0321286618_13 - Chapter 13 Dividend Policy Instructors...

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