RSM333 lecture6 - Dividend Policy Outline I. Definitions...

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Dividend Policy 6 Outline I. Definitions II. Does dividend policy matter? s No (Modigliani-Miller again) s Yes (taxes again) s Maybe III. Stock repurchase IV.Why companies pay dividends
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1 Sabrina Buti, Rotman School of Management, RSM 333 Different Types of Dividends s Many companies pay a regular cash dividend . – Public companies often pay quarterly. – Sometimes firms will throw in an extra cash dividend. – The extreme case would be a liquidating dividend. s Often companies will declare stock dividends . – No cash leaves the firm. – The firm increases the number of shares outstanding. s Some companies declare a dividend in kind . – Wrigley’s Gum sends around a box of chewing gum.
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2 Sabrina Buti, Rotman School of Management, RSM 333 Cash Dividend: Definitions Record Date - Person who owns stock on this date received the dividend. Ex-Dividend Date - Date that determines whether a stockholder is entitled to a dividend payment; anyone holding stock until this date is entitled to a dividend. Cash Dividend - Payment of cash by the firm to its shareholders.
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3 Sabrina Buti, Rotman School of Management, RSM 333 Procedure for cash dividend payment 25 Oct. 1 Nov. 2 Nov. 7 Dec. Declaration Date Cum-dividend Date Ex-dividend Date Payment Date Sequence of events: 1) Board of directors decision 2) Declaration date: the firm announces a dividend 3) Cum-dividend date: the last day that the buyer of a stock is entitled to the dividend. 4) Ex-dividend date: the first day that the seller of a stock is entitled to the dividend. 5) Record Date: The corporation prepares a list of all individuals believed to be stockholders as of 4 November. Record Date 4 Nov.
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4 Sabrina Buti, Rotman School of Management, RSM 333 Price behavior around the ex-dividend date In a perfect world, the stock price will fall by the amount of the dividend on the ex-dividend date: $ P $ P - div Ex-dividend Date - t -2 -1 0 +1 +2
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5 Sabrina Buti, Rotman School of Management, RSM 333 Price behavior around the ex- dividend date (cont.) s Taxes complicate things a bit – If T d is the personal tax rate on dividend of the buyer, and if the dividend payment is D , the buyer will be indifferent between: s Buying the stock for $ P on or after the ex-dividend date s Buying the stock for $ P + D x (1- T d ) before Price drop = D x (1- T d ), where T d is the personal tax rate on dividend of the marginal investor Empirically s The price drop is less than the dividend s It occurs within the first few minutes of the ex-dividend date
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Sabrina Buti, Rotman School of Management, RSM 333 MM proposition: Investors are indifferent to dividend policy Assumptions: 1) No taxes, brokerage fees, etc. 2) Homogenous expectations
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This note was uploaded on 04/23/2011 for the course RSM 333 taught by Professor Sabrinabutti during the Spring '11 term at University of Toronto- Toronto.

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RSM333 lecture6 - Dividend Policy Outline I. Definitions...

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