corp_Ch17_09

corp_Ch17_09 - CLASS NOTES WEEK IV BMA Ch.17 Payout Policy...

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IRPGEN424 Corporate Finance Alex Kane 1 CLASS NOTES WEEK IV BMA Ch.17 Payout Policy
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IRPGEN424 Corporate Finance Alex Kane 2 Cash and Stock Dividends Three dates: (1) Declaration/announcement -- how much in cash and stock (2) Ex-dividend trade / The date of record (3) payment date = checks/stock certificates are in the mail Financial statements: Income statement: Net income minus cash dividend to balance sheet Balance sheet: Cash up by NI + Dep minus cash dividend Fixed assets down by Dep RE up by NI less cash or stock div, Common stock up by stock div, equity up by change in RE
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IRPGEN424 Corporate Finance Alex Kane 3 Alternative to div: stock repurchase Assume same dates Income statement: same with no div Balance sheet: cash up by NI plus dep down by amount spent on repurchase common stock and surplus increased by amount of repurchase
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IRPGEN424 Corporate Finance Alex Kane 4 Digression: Perfect markets No taxes No transaction cost No shareholder has market power All information about firm/markets is publicly available -- no private information, no asymmetric information (info available to management that isn’t available to public)
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IRPGEN424 Corporate Finance Alex Kane 5 Div and value with perfect markets (1) set up A firm has a one-period profitable investment opportunity that requires I with a positive NPV Cash on hand equals I Value of firm = V(0) = I + npv Required rate = r The firm can invest and pay no dividends now, or: Pay a cash dividend = div • borrow D = div at rate r D and pay later div(1+ r D )
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corp_Ch17_09 - CLASS NOTES WEEK IV BMA Ch.17 Payout Policy...

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