AN EXAMPLE OF DIVIDEND IRRELEVANCY

AN EXAMPLE OF DIVIDEND IRRELEVANCY - Example of Dividend...

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Example of Dividend Policy Irrelevance, page 1 of 1 AN EXAMPLE OF DIVIDEND POLICY IRRELEVANCE An example provides insight into the dividend irrelevance proposition. Suppose that now is time 0, and one year from now is time 1. Carter Company just paid its time 0 dividend (assume dividends are paid once per year), and plans to publicly announce its dividend policy for the next year. It is considering the following two policies (all dollar amounts in $millions). Policy I : At time 1, dividends = $110, new share sales = 0, treasury stock purchases = 0 Policy II : At time 1, dividends = $121, new share sales = $11, treasury stock purchases = 0 The time 1 total equity value (the $2,200 in column (3) of the exhibit below) is the time 1 market value of all shares (shares that were outstanding at time 0 and new shares issued at time 1. It is the ex-dividend (post time 1 dividend) value of the firm’s equity at time 1. This amount ($2,200) is the same under policies I and II because the firm’s assets and financial structure are exactly
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This note was uploaded on 05/20/2010 for the course DOF AAf001-6 taught by Professor Changchungdo during the Spring '10 term at 카이스트, 한국과학기술원.

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