UGBA 103 Lecture 18

UGBA 103 Lecture 18 - Todays plan Dividend policy Capital...

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1 class #18 page 1 The Dividend Controversy class #18 class #18 page 2 Today’s plan • Dividend policy • Capital structure – answer the big question: “does debt matter ???” – if time permits class #18 page 3 Today’s plan • How Dividends Are Paid • How Do Companies Decide on Dividend Payments? • Information in Dividends and Stock Repurchases • The Dividend Controversy class #18 Types of Dividends ~ Cash Div ~ Regular Cash Div ~ Special Cash Div ~ Stock Div ~ Stock Repurchase (3 methods) 1. Buy shares on the market 2. Tender Offer to Shareholders 3. Private Negotiation class #18 page 5 Dividend Payments Cash Dividend - Payment of cash by the firm to its shareholders. Ex-Dividend Date - Date that determines whether a stockholder is entitled to a dividend payment; anyone holding stock before this date is entitled to a dividend. Record Date - Person who owns stock on this date received the dividend. class #18 page 6 Dividend Payments Stock Dividend - Distribution of additional shares to a firm’s stockholders. Stock Repurchase - Firm buys back stock from its shareholders. Stock Splits - Issue of additional shares to firm’s stockholders.
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2 class #18 page 7 The Dividend Decision 1. Firms have longer term target dividend payout ratios. 2. Managers focus more on dividend changes than on absolute levels. 3. Dividends changes follow shifts in long-run, sustainable levels of earnings rather than short-run changes in earnings. 4. Managers are reluctant to make dividend changes that might have to be reversed. Lintner’s “Stylized Facts” (How Dividends are Determined) class #18 page 8 Dividend Policy -15 -10 -5 0 5 10 15 Div Rise Div Cut Source: Healy & Palepu (1988) Change EPS/Price at t = 0 as % Year Impact of Dividend Changes on EPS class #18 page 9 Dividend Policy is Irrelevant • Since investors do not need dividends to convert shares to cash they will not pay higher prices for firms with higher dividend payouts. In other words, dividend policy will have no impact on the value of the firm. class #18 page 10 Dividend Policy is Irrelevant Example - Assume Rational Demiconductor has no extra cash, but declares a $1,000 dividend. They also require $1,000 for current investment needs. Using M&M Theory, and given the following balance sheet information, show how the value of the firm is not altered when new shares are issued to pay for the dividend.
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UGBA 103 Lecture 18 - Todays plan Dividend policy Capital...

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