Chapter 19: Dividends and Other Payouts
Declaration date – the board of directors declares a dividend payment that will be
made on March 14.
Ex–dividend date – the shares trade ex dividend on and after this date.
this date receive the dividend.
Purchasers on or after this date do not receive the
Record date – the declared dividends are distributable to shareholders of record on
Payment date – the checks are mailed.
Based on Miller and Modigliani reasoning, the stock will sell for $9.87.
This is the same price you
paid for the stock, and you are selling
the ex–dividend date.
When the stock goes ex–
dividend, the price is expected to fall $0.50 a share.
The change in price is due to the change in dividends, not due to the change in dividend policy.
Dividend policy can still be irrelevant without a contradiction.
If the dividend is declared, the price of the stock will drop on the ex–dividend date by the
value of the dividend, $3.75.
It will then trade for $746.25.
If it is not declared, the price will remain at $750.
Mann’s outflows for investments are $2,000,000.
These outflows occur immediately.
year from now, the firm will realize $1,000,000 in net income and it will pay $500,000 in
dividends, but the need for financing is immediate.
Mann must finance $2,000,000 through
the sale of shares worth $750.
It must sell $2,000,000 / $750 = 2,666.67 shares.
The MM model is not realistic since it does not account for taxes, brokerage fees,
uncertainty over future cash flows, investors’ preferences, signaling effects, and agency
The ex–dividend date is Feb. 27, which is two business days before the record date.
The stock price should drop by $1.76 on the ex–dividend date.
Knowing that share price can be expressed as the present value of expected future dividends does
not make dividend policy relevant.
Under the growing perpetuity model, if overall corporate cash
flows are unchanged, then a change in dividend policy only changes the timing of the dividends.
The PV of those dividends is the same.
This is true because, given that future earnings are held
constant, dividend policy simply represents a transfer between current and future stockholders.
Answers to End–of–Chapter Problems