Lecture Note Two_Tsing Hua_2009 - Lecture Note 2 Dividend...

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Corporate Finance Lecture Note 2 1 Lecture Note 2 Dividend Policy
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Corporate Finance Lecture Note 2 2 What is in This Note? Overview of Types of Dividends Overview of Forms of Dividends Overview of Dividend Policies Overview of Real World Dividend Decisions Reference: Chapter 18 of RWJJ, Chapter 16 of BMA
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Corporate Finance Lecture Note 2 3 Roadmap Understand dividend types and how they are paid Understand why share repurchases are an alternative to dividends Understand dividend polices Understand real world dividend decisions
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Corporate Finance Lecture Note 2 4 Types of dividends
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Corporate Finance Lecture Note 2 5 Different Types of Dividends Many companies pay a regular cash dividend . Public companies often pay quarterly. Sometimes firms will pay an extra cash dividend. The extreme case would be a liquidating dividend. Companies will often declare stock dividends. No cash leaves the firm. The firm increases the number of shares outstanding.
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Corporate Finance Lecture Note 2 6 Standard Method of Cash Dividend Record Date – Date on which company determines existing shareholders. Ex-Dividend Date ( e ) - Date that determines whether a stockholder is entitled to a dividend payment; anyone holding stock immediately before this date is entitled to a dividend. Cash Dividend - Payment of cash by the firm to its shareholders.
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Corporate Finance Lecture Note 2 7 Procedure for Cash Dividend 25 Oct. 1 Nov. 2 Nov. 5 Nov. 7 Dec. Declaration Date Cum- dividend Date Ex- dividend Date Record Date Payment Date Declaration Date : The Board of Directors declares a payment of dividends. Cum-Dividend Date : Buyer of stock still receives the dividend. Ex-Dividend Date : Seller of the stock retains the dividend. Record Date : The corporation prepares a list of all individuals believed to be stockholders as of 5 November.
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Corporate Finance Lecture Note 2 8 t: Ex-dividend date time Stock price D: Cash dividend S 0 S t S 0 - De -rt
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Corporate Finance Lecture Note 2 9 t: Ex-dividend date time Stock price D*(1-dividend tax) S 0 S t S 0 - ( D *(1-dividend tax)) e -rt
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Corporate Finance Lecture Note 2 10 The stock price will decrease proportionally with the amount of cash dividends.
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Corporate Finance Lecture Note 2 11 In-Class Exercise Ross, Westerfield, and Jaffe Question 1 (pp. 543) Lee Ann has declared a $6 per share cash dividend. Suppose that the capital gains are not taxed, but dividends are taxed at 15% for the representative investor. Lee Ann sells for $90 per share, what do you think the ex-equilibrium dividend price will be? Ans: Aftertax dividend = $6.00(1 – .15) = $5.10. The stock price should drop by the aftertax dividend amount, or: Ex-dividend price = $90 – 5.10 = $84.90
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Corporate Finance Lecture Note 2 12 Forms of Dividends
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13 Forms of Dividend Payments Stock Repurchase - Firm buys back stock from its shareholders. Stock Dividend
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This note was uploaded on 04/18/2010 for the course FINANCE 936116531 taught by Professor Wuyiling during the Spring '10 term at Nashville State Community College.

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Lecture Note Two_Tsing Hua_2009 - Lecture Note 2 Dividend...

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