FIN 620-session4 agenda

FIN 620-session4 agenda - FIN 620 Capital Markets,...

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FIN 620 Capital Markets, Institutions, and Long-Term Financial Management Session 4  Agenda 1. Lecture Notes/Comments 2. Power points 3. Self Study Materials 4. Homework 5. Class Discussion 1. Lecture Notes/Comments RWJ, Chapters 18, 19 Having considered financing and its effect on value in the earlier sessions, in this session we now turn our attention to payouts made to investors (Chapter 18 RWJ). For equity investors this is generally in the form of dividends, but can also be in the form of a share repurchase. An important question in corporate finance is what are the reasons why firms pay dividends? Dividends are a form of anti-financing; that is, they return money to investors rather than receiving money. Carrying over the MM logic from financing would suggest that dividend policy is irrelevant, but is it really so in the real world? We discuss some theories of dividends. In the second half of this session (Chapter 19 RWJ) we present some issues involved in the sale of securities (mainly equity) by firms to the public. We discuss: the role of investment banks; the impact on value of the firm from an issue; rights offers; and the private placement market. Different Types of Dividends 1. Regular cash dividend – normal dividends, usually paid on a quarterly basis. Extra cash dividend – paid over and above the regular dividend, may or may not be repeated. 2. Special dividend – one-time dividend paid over and above the regular dividend, will not be repeated. 3. Stock dividend – pay owners with additional shares of stock. No cash actually leaves the firm. Dividends in kind – pay owners using products or services of the firm Standard Method of Cash Dividend Payment:
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1. Declaration date – the dividend is declared by the Board of Directors and becomes a liability of the firm 2. Ex-dividend date – occurs 2-3 days prior to the date of record; if you purchase the stock on or after the ex-dividend date, you will not receive the dividend 3. Date of record – firm prepares the list of stockholders who will receive dividends 4. Date of payment – checks are mailed The stock price drops by approximately the amount of the dividend on the ex-dividend date. As with the other decisions we have looked at, dividend policy will only matter if it affects the wealth of stockholders. The Benchmark Case: The Irrelevance of Dividend Policy: The idea behind the irrelevance argument is that if the firm has a lower payout ratio now, it will reinvest the capital into the firm, grow the firm faster, and pay higher dividends later. On the other hand, if the firm has a higher payout ratio now, it will reinvest less capital back into the firm and pay lower dividends later. As long as the required return (exactly) is earned on investments, it is irrelevant which choice the firm makes. This argument is an extension of the MM theorem to dividend policy. Homemade dividends:
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This note was uploaded on 02/14/2011 for the course FINANCE 620 taught by Professor Halstead during the Fall '09 term at UMBC.

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FIN 620-session4 agenda - FIN 620 Capital Markets,...

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