Case Studies in Corporate Finance

Case Studies in Corporate Finance -...

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Unformatted text preview: 2-1Lecture#22•Dividends and Other Payouts (Chapter 18)2-2Different Types of Payouts•Many companies pay a regular cash dividend.–public companies often pay quarterly–sometimes firms will pay an extra cash dividend•Other companies use stock buybacks.2-3Procedure for Cash Dividend25 Oct.1 Nov.2 Nov.5 Nov.7 Dec.Declaration DateCum-dividend DateEx-dividend DateRecord DatePayment Date…Declaration Date: Board of directors declares a payment of a dividendCum-Dividend Date: Buyer of stock still reveives the dividendEx-Dividend Date: Seller of stock retains the dividendRecord Date: The corporation prepares a list of all the individuals believed to be stockholders as of 11/52-4Price Behavior•In a perfect world, the stock price will fall on the ex-dividend date.$P-t…-2-1+1+2…Price drops by the amount of the cash dividend.2-5The Irrelevance of Dividend Policy•Investors will will not pay higher prices for firms with higher dividends.•Dividend policy will have no impact on the value of the firm because investors can create whatever income stream they prefer by using homemade dividends.2-6Homemade Dividends•Bianchi Inc. is a $42 stock about to pay a $2 cash dividend.•Bob Investor owns 80 shares and prefers a $3 dividend.•Bob’s homemade dividend strategy:–Sell 2 shares ex-dividend$3 Dividend$240$0$240$39 x 80homemade dividendsCash from dividend$160Cash from selling stock$80Total Cash$240Value of Stock Holdings $40 x 78 =$3,120 =$3,1202-7Dividend Policy Is Irrelevant•In the above example, Bob Investor began with...
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This note was uploaded on 07/04/2011 for the course FINA 463 taught by Professor Tsyplakov during the Fall '10 term at South Carolina.

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Case Studies in Corporate Finance -...

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