Final Exam Notes

Final Exam Notes - Final Set of Lecture Notes Chapters...

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Final Set of Lecture Notes Issue : How much should a company pay out to stockholders and how much should it retain? A firm’s earnings are either paid out in the form of dividends or retained. What is presumably done with retained earnings? Firms with +NPV opportunities can pay dividends and issue new shares or the firm can retain earnings. Firms with no +NPV opportunities should disburse their earnings to shareholders. Alternative is holding cash, wasting cash, or investing in the securities of other firms or governments. How do firms disburse cash to stockholders? a) dividends (can be relatively fixed or relatively variable over time) b) buy back stock How much earnings are retained vs. disbursed? . 1
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A. How dividends are paid: 1) Dividend set and declared by board of directors 2) Stock goes ex-dividend 3) Payment is made to stockholders on date of record 4) Dividend checks are mailed to stockholders Timing example: Type of dividends: A. Regular cash dividend : quarterly, typically remains relatively constant or gradually increases over time. B. Special dividend : One-time dividend; no expectation of continuation. However, some firms have a history of paying a relatively constant “special dividend” along with a quarterly dividend once-per-year, For these firms, stockholders may develop an expectation of continuity. C. In-kind dividend: (could be a liquidating dividend): Product dividend. I.e., Dundee Crematorium offered discounts to large shareholders. D. Stock dividend: New shares issued by the firm, disbursed as a dividend. Similar conceptually to a small stock split. Exg: a 5% stock dividend will result in the “payment” of 5 additional shares for each 100 shares you already own. Are stock dividends as valuable as other types of dividends? Which type of dividend is most similar to a stock repurchase ? B. Stock Repurchases: Methods: 1) Buy stock in open market, like any other investor 2) Buy back stated number of shares at a fixed price (typically 20% above current market price). 3) Dutch auction: firm states a series of prices at which it will buy back stock. Shareholders submit offers declaring how many shares they are willing to sell 2
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at each price, and firm calculates the lowest price it can buy back the stated number of shares. 4) Direct negotiation with a given stockholder a. Greenmail (define): What if managers believe their stock is over valued in the market. Is this a good time to repurchase shares of stock? (buy ____, sell ______) Example: Note: Stock repurchases are an increasingly common method to disburse cash. C. Concept: Dividend Irrelevance In “ perfect capital markets ” (no information asymmetry, no taxes, no transaction costs) dividend policy is irrelevant. Balance sheet example:
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This document was uploaded on 10/26/2011 for the course FIN 302 at Miami University.

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Final Exam Notes - Final Set of Lecture Notes Chapters...

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