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Unformatted text preview: 15 Chapter model 1/06/09 = This equation can be transformed into the constant growth stock valuation model: = ESTABLISHING DIVIDEND POLICY IN PRACTICE (Section 15-3) Dividends PROBLEM Net Income $60 Target equity ratio 60% Total capital budget $40 Dividends = Dividends = $60 60% $40 Dividends = $36 Resulting Payout = 60.0% Cap Bud $36 60.0% Cap Bud $36 60.0% $40 $36 60.0% $40 $36 60.0% $70 $18 30.0% $70 $18 30.0% $150 -$30-50.0% $150 $0 0.0% Chapter 15. Distributions to Shareholders: Dividends and Share Repurchases The return on a stock consists of two elements, dividends and capital gains. In rate of return terms, the total return consists of a dividend yield plus a capital gains yield, the g term in the following equation: r s (D 1 / P 0 ) + g P D 1 / (r s g) If a company increases its dividend payout, that raises the numerator of the stock price equation, D 1 , and that tends to increase the stock price. However, raising the dividend will lower the amount of earnings available for reinvestment, and thus it will lower the growth rate, which will tend to lower the stock price. (Under certain conditions, g = (1 Payout) (ROE). If the payout were increased to 100%, or 1.0, then g would drop to zero.) Thus, If the payout were increased to 100%, or 1....
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- Fall '06