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Unformatted text preview: Chapter 17 Dividends and Payout Policy Slide 17 - 1 Key Concepts and Skills z Understand dividend types and how they are paid z Understand the issues surrounding dividend policy decisions z Understand why share repurchases are an alternative to dividends z Understand the difference between cash and stock dividends Slide 17 - 2 ¡ Dividend Dividend is a payment made out of a firm’s earnings to its owners, in the form of either cash or stock. Basic types of cash dividends ¾ Regular cash dividend: cash payments made directly to stockholders, usually each quarter. ¾ Extra cash dividend: indication that the “extra” amount may not be repeated in the future. ¾ Special cash dividend: similar to extra dividend, but definitely will not be repeated. ¾ Liquidating dividend: some or all of the business has been sold. Cash Dividends Slide 17 - 3 ¡ A Chronology z Declaration date: Board declares the dividend, and it becomes a liability of the firm z Ex-dividend date: If you buy the stock before this date, you are entitled to the dividend; if you buy the stock on this date or after, the previous owner will get the dividend. ¾ Two business days before date of record ¾ Stock price generally drops by about the amount of the dividend z Date of record: Holders of record are determined, and they will receive the dividend payment. z Date of payment: Checks are mailed. Dividend Payment Slide 17 - 4 Figure 17.2. Cum-dividend stock price vs. ex-dividend stock price. Dividend Payment and Price Change Slide 17 - 5 Example (regular dividend): The balance sheet for American Pie Corp. is shown here in market value terms. There are 7,500 shares of stock outstanding. Market-value balance sheet Cash $20,000 Equity $175,000 Fixed Assets $155,000 Total $175,000 Total $175,000 The company has declared a dividend of $1.1 per share. The stock goes ex dividend tomorrow. Ignoring any tax effects, what is the stock selling for today? What will it sell for tomorrow? Today: 175,000/7,500 = $23.33 Tomorrow: 23.33 – 1.10 = $22.23 Dividend Payment and Price Change Slide 17 - 6 ¡ Dividends Matter The value of the stock is based on the present value of expected future dividends....
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This note was uploaded on 04/18/2011 for the course FINA 1003 taught by Professor Lin during the Fall '11 term at HKU.
- Fall '11