FINA274 lecture 4

FINA274 lecture 4 - Corporate Payout Policy Lecture 4.a...

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Corporate Payout Policy Lecture 4.a. FINA 274 1 Lecture 4: Corporate payout policy
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Payout methods Dividends Cash Stock Repurchases Firm buys back it own shares 1. on the open market 2. From a large shareholder Spinoffs Split off a division or subsidiary into a stand-alone company Give it to shareholders as a dividend (i.e. new stock) FINA 274 Lecture 4: Corporate payout policy 2
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Stock dividend Also known as a “Stock Split” Company pays a dividend in the form of new shares It often is expressed as a ratio 2:1 ratio give two stocks for every one owned, and price falls by an equivalent amount 3:2 ratio gives 3 stocks for every two owned FINA 274 Lecture 4: Corporate payout policy 3
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Example: Sun Microsystems FINA 274 Lecture 4: Corporate payout policy 4 This is what you see when you look at the historical stock price – adjusted for stock splits Stock splits
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Example: Sun Microsystems FINA 274 Lecture 4: Corporate payout policy 5 December 1995, 2 for 1 split -- price drops from $97.75 to $48.35 (-50.5%) -- shares outstanding double -21 -16 -11 -6 -1 4 9 14 19 0 2 4 6 8 10 12 0 2 4 6 8 10 12 Day relative to split Stock Price ($) Num Price halved
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Why stock splits? Does it add value? No (in theory) -- It’s just a paper transaction So why do firms do it? 1. Maintain a Trading range Keep price low so that investors can “afford” a round lot (100 shares) This is a liquidity argument (splits increase trading) Magic “split” number is around $100 per share 2. Managerial signaling Signal of favorable future prospects (i.e. managers thing stock prices will increase) Stock prices increase 2-3% on average upon announcement This is credible since managers are reluctant to have a reverse split FINA 274 Lecture 4: Corporate payout policy 6
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Evidence of trading range FINA 274 Lecture 4: Corporate payout policy 7 Distribution of stock prices of 423 firms from year-end 1980 Distribution of stock prices for the same 423 firms from year-end 2008 Average market value increases from $1.24 billion to $13.8 Billion over the same period
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Berkshire Hathaway FINA 274 Lecture 4: Corporate payout policy 8 Bucking the trend -- Warren Buffet has never had a stock split -- and has never paid a cash dividend $100,000 per share
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Reverse split: Sun Microsystems FINA 274 Lecture 4: Corporate payout policy 9 Reverse Stock splits -- Increase share price by reducing the number of shares outstanding -- often done to meet minimum listing requirements of an exchange 1:4 Reverse split 2:1 2:1 2:1 2:1 2:1
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Reverse split: Sun Microsystems FINA 274 Lecture 4: Corporate payout policy 10 -21 -16 -11 -6 -1 4 9 14 19 0 2 4 6 8 10 12 0 500000 1000000 1500000 2000000 2500000 3000000 3500000 4000000 4500000 5000000 Day relative to split Stock Price ($) Num Price quadruples November 2007, 4 for 1 reverse split -- price increases from $5.14 to $20.51 (299.0%) -- shares outstanding decrease by a factor of four
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Cash dividends Cash dividend Payment of cash by the firm to its shareholders
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This note was uploaded on 02/29/2012 for the course FINA 274 taught by Professor Williamhandorf during the Fall '11 term at GWU.

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FINA274 lecture 4 - Corporate Payout Policy Lecture 4.a...

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