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Ross5eChap19sm - Chapter 19 Dividends and Other Payouts...

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Chapter 19: Dividends and Other Payouts 19.1 February 16: Declaration date – the board of directors declares a dividend payment that will be made on March 14. February 24: Ex–dividend date – the shares trade ex dividend on and after this date. Sellers before this date receive the dividend. Purchasers on or after this date do not receive the dividend. February 26: Record date – the declared dividends are distributable to shareholders of record on this date. March 14: Payment date – the checks are mailed. 19.2 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 before the ex–dividend date. When the stock goes ex– dividend, the price is expected to fall $0.50 a share. 19.3 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. 19.4 a. 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. b. If it is not declared, the price will remain at $750. c. Mann’s outflows for investments are $2,000,000. These outflows occur immediately. One 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. d. 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 costs. 19.5 a. The ex–dividend date is Feb. 27, which is two business days before the record date. b. The stock price should drop by $1.76 on the ex–dividend date. 19.6 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 B–52
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In a more realistic context and assuming a finite holding period, the value of the shares should represent the future stock price as well as the dividends. Any cash flow not paid as a dividend will be reflected in the future stock price. As such the PV of the flows will not change with shifts in dividend policy; dividend policy is still irrelevant. 19.7 a. The price is the PV of the dividends, and there are only 2 more cash flows associated with this stock: D 1 =$2 and D 2 =$18.5673. Find the present value of this cash flow series: 31 . 16 $ 13 . 1 5673 . 18 $ 13 . 1 2 $ 2 = + = PV b. The current value of your shares is ($16.31)(460) = $7,502.60. Since you want equal payments, you want an annuity, which solves: 2 13 . 1 13 . 1 60 . 502 , 7 $ X X + = Solving for X , the cash flows are $4,497.68 each year, However, you will receive $920 in
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