Chapter 18: Dividends and Other Payouts
Declaration date - the board of directors declares a dividend payment
that will be made on March 14.
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.
Record date - the declared dividends are distributable to shareholders
of record on this date.
Payable date - the checks are mailed.
Based on Miller and Modigliani reasoning, the stock will sell for $8.75.
This is the
same price you paid for the stock, and you are selling
the ex-dividend date.
When the stock goes ex-dividend, the price is expected to fall $0.75 a share.
If the dividend is declared, the price of the stock will drop on the ex-dividend date by
the value of the dividend, $5.
It will then trade for $95.
If it is not declared, the price will remain at $100.
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 $100.
It must sell $2,000,000 / $100 =
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
The ex-dividend date is Feb. 27, which is two business days before the record date.
The stock price should drop by $1.25 on the ex-dividend date.
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
This is true because, given that future earnings are held constant, dividend
policy simply represents a transfer between current and future stockholders.
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.
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