BU393L14 Dividends (August 4) - Why Do We Care About...

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1 © Copyright 2010, Alan Marshall 1 DIVIDENDS © Copyright 2010, Alan Marshall 2 Why Do We Care About Dividends? Why Do We Care About Dividends? > Dividend policy is a decision to give money back to shareholders and NOT invest in a new project. > Affects the firm’s capital budgeting decision: Paying dividends means less internal cash available for other uses. Paying dividends means borrowing money to invest in new projects. > Historically firms pay out dividends in both good times and bad times. © Copyright 2010, Alan Marshall 3 Dividends and Cash Flow Dividends and Cash Flow > Dividends are part of the big “Cash Flow” picture > Cash from Operations > Net Financings New issues less retirements > Net Capital Transactions Expenditures less sales of assets > Reinvestment and/or Distribution © Copyright 2010, Alan Marshall 4 Distributions Distributions > Firms make distributions to their shareholders 2 ways > Cash Distributions - Dividends > Share Distributions - Stock Dividends and Stock Splits > (There is a 3rd distribution - Rights - that were dealt with in Lecture 11.)
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2 © Copyright 2010, Alan Marshall 5 Cash Distribution Cash Distribution > Excess cash can be returned to shareholders as value 2 ways > Dividends - cash payments to shareholders > Share repurchase - buying stock for retirement, remaining stock increases in value. © Copyright 2010, Alan Marshall 6 Types of Cash Dividends Types of Cash Dividends > Regular cash dividends > Extra cash dividends > Special dividends These occur rarely when the firm has an usually large amount of excess cash > Liquidating dividends These occur when the firm is being wound up © Copyright 2010, Alan Marshall 7 Importance of Dividends Importance of Dividends > TSX 300 in 1976: 1000, Dec/10, about 11750 > In 33 years, this bundle of securities has grown about 12 times in value which translates into an average of 7.75% p.a. > The TSX Total Return index that assumes dividends are reinvested in the index > At Dec/10 the TRI was about 31,000 (11% p.a.) which is ~2.6x the TSX300 Index Value. © Copyright 2010, Alan Marshall 8 Another View Another View > If you invest $2,000 for 42 years Start work at 23 and retire at 65 > Without reinvesting dividends (7.75% p.a.): $567,500 terminal value > With reinvesting dividends (11% p.a.): $1,438,000 terminal value
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3 © Copyright 2010, Alan Marshall 9 Dividend Dates Dividend Dates © Copyright 2010, Alan Marshall 10 Dividend Dates Dividend Dates > Declaration date > Ex-dividend date 2 days prior to the Record Date Share price will fall by the amount of the dividend > Date of record > Payment Date © Copyright 2010, Alan Marshall 11 Dividend Dates Dividend Dates <= Two Business Days => <==== Three Business Days ====> Record Date (Declaration Date) Payment Date Anytime June 18/10 June 17/10 June 16/10 June 15/10 July 5/10 Last cum- Div Date Ex-Dividend Date > Shareholders that owned the shares on the close
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This note was uploaded on 10/15/2011 for the course BUSINESS bu393 taught by Professor - during the Spring '11 term at Wilfred Laurier University .

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BU393L14 Dividends (August 4) - Why Do We Care About...

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