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15 Chapter model

# 15 Chapter model - 1 2 3 4 5 A B 15 Chapter model C D E...

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15 Chapter model 3/22/2010 7:09 Chapter 15. Distributions to Shareholders: Dividends and Share R = This equation can be transformed into the constant growth stock valuation model: = ESTABLISHING DIVIDEND POLICY IN PRACTICE (Section 15.3) Dividends = PROBLEM Net Income \$100 Target equity ratio 60% Total capital budget \$50 Dividends = Dividends = \$100 60% × \$50 Dividends = \$70 Resulting Payout = 70.0% The return on a stock consists of two elements, dividends and capital gains. In rate of retur consists of a dividend yield plus a capital gains yield, the g term in the following equation: r s (D 1 / P 0 ) + g P 0 D 1 / (r s − g) If a company increases its dividend payout, that raises the numerator of the stock price equ to increase the stock price. However, raising the dividend will lower the amount of earnings reinvestment, and thus it will lower the growth rate, which will tend to lower the stock price. conditions, g = (1−payout)(ROE). If the payout were increased to 100%, or 1.0, then g would increasing the dividend payout has two opposing effects on a firm's stock price. Manageme the payout policy that balances these two forces and thereby maximizes the stock price.

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15 Chapter model - 1 2 3 4 5 A B 15 Chapter model C D E...

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