FIN302-Exam3 ClassNotes

FIN302-Exam3 ClassNotes - Final Set of Lecture Notes...

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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? It’s reinvested Firms with +NPV opportunities can pay dividends and fun new projects by issuing new shares or the firm can retain earnings. (Is there a cost to issuing new shares? o Yes, floatation costs 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 ( stock repurchase ) c) 2005: 41% of firms pay a dividend. Stock repurchase becoming more common; ExxonMobil repurchased 418.28B; Citi repurchased $12.8B; Intel repurchased $10.6B and Cisco repurchased $10.28B How much earnings are retained vs. disbursed? . 1
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- Dividends are much smoother than repurchases because managers like to maintain the dividend level overtime even if it means it has to pay dividends even though they are losing money. o Do this by selling part of firm, liquidate assets o Bondholders become very upset when this happens. In the event of bankruptcy they will not be paid because the stockholders will be paid dividends by the firm selling off the company What happens to stock price when a repurchase occurs? - It wouldn’t change; the money has left the firm so the assets would decrease along with the equity and the number of shares outstanding. 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: You see the stock price reaction on the Declaration Date in terms of it being good or bad news. 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. 2
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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?
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This note was uploaded on 11/15/2011 for the course FIN 302 taught by Professor Kellybrunarski during the Spring '11 term at Miami University.

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FIN302-Exam3 ClassNotes - Final Set of Lecture Notes...

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