Ch 18 - Ch 18 Dividends and Dividend Policy 1. Cash...

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Ch 18 Dividends and Dividend Policy
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1. Cash dividends and payment 1) Def: a payment made out of a firm’s earnings to shareholders (owners) 2) Types Regular cash dividends Extra cash dividends Special dividends Liquidating dividends
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3) Dividend Payment: A Chronology (1) Declaration date: Resolution date to pay a dividend (2) Ex-dividend date: Two business day before the date of record. Shareholders listed until this date would receive dividends. (3) Date of record: Declared dividends are distributable. (4) Payment date: Mailing date Usually, stock price drops after ex-dividend date.
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2. Does dividend policy matter? 1) Irrelevance Ex) Fin 314 is all equity firm. Managers decide to dissolve the firm. The liquidation would generate $10,000 in each of next two years. The proceed from liquidation would be distributed as dividends. There are 100 shares. Dividend per share is $100. A rate of return is 10%. Policy 1: Equal dividend to each year - P=$100/(1.1)+$100/(1.1^2) =173.5
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Policy 2: Non-equal dividend - The firm decides to pay $11,000 (=100* $110) in the first year. But it has only $10,000. Thus issuing 10 new stocks at $100, the firm raise $1000. Here the firm promised 10% return to new stock holders in the second year. In the first year, dividend per share is $110 for old stock holders. In the second year, new shareholder would receive 1000*(1+0.1) =$1,100. Thus only 8,900(=10,000-1,100) is left for old shareholders in the second year. Dividend for old shareholders in the second year is 89. P = 1100/(1.1)+89/(1.1^2) = 173.55 Thus dividend policy may be irrelevant.
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3) Homemade dividends. Regardless of dividend policy of a firm, investors are able to set up their portfolio generating certain amounts of dividends. 3. Real world factors favoring a low payout: tax and
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This note was uploaded on 02/23/2010 for the course FIN 81341 taught by Professor Yang during the Spring '10 term at CSU San Bernardino.

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Ch 18 - Ch 18 Dividends and Dividend Policy 1. Cash...

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