COMM
Topic 12 - Lecture Notes.pdf

Such a policy is based on the following goals ranked

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amounts to a compromise dividend policy. Such a policy is based on the following goals (ranked in Compromise Dividend Policy order of importance): - Avoid cutting back on positive NPV projects to pay a dividend. - Avoid cutting dividends. - Avoid issuing new equity. 26 - Maintain a target debt-to-equity ratio. - Maintain a target dividend payout ratio (a long-run proportion of earnings to be paid out as dividends).
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Stock Split: Issuance of additional shares to a firm’s shareholders, without changing owner’s equity. No cash is exchanged; only a change in the number of shares issued and a change in the value of a share occurs. f Stock Dividends and Stock Splits Example: Two-for-one split – current shareholders will get one additional share for every one share that they own. Stock Dividend: Distribution of additional shares to a firm’s shareholders, reducing the value of each share outstanding. No cash is exchanged; shareholders receive additional shares. A 10% stock dividend would i h t h t t di 27 issue one share per ten shares outstanding. A stock dividend is a mini stock split. No cash is involved in either case. With more shares outstanding, market value per share drops, but total market value of the firm stays the same Popular trading range: proponents of stock splits, who recognize that stocks are traded in round lots of 100 shares, argue that a security has a proper trading An Argument in Favour of Stock Splits range. When the security deviates from this range, a split is required. Example: Berkshire Hathaway Inc. (managed by Warren Buffet) traded for $81,790 a share … could anyone afford it?? Large players in the market (institutional investors) shouldn’t be affected by splits since they trade in huge volumes 28 volumes. Depending on how one measures liquidity, there is only weak evidence that liquidity increases after stock splits.
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Share Repurchase: a firm buys back stocks from its shareholders (usually in the open market). Share Repurchases A share repurchase has the same effect as a cash dividend: the cash account in the firm is reduced and the shareholders as a group have more cash. The book value of the equity is reduced in both cases. 29 Open Market Repurchase Tender Offer Repurchase 30
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The stock of Payout Corp. will go ex-dividend tomorrow. The dividend will be $1.00 per share, and there are 20,000 shares of stock outstanding. Today’s market Example A: Cash Dividend value balance sheet for Payout is shown below: Assets Liabilities and Equity Cash $100,000 Equity $1,000,000 Fixed assets $900,000 Debt $0 31 a. What price is Payout stock selling for today? b. What price will it sell for tomorrow? Ignore taxes. a. Today’s price = $1m/20,000 = $50 per share (with- dividend). For reference, a shareholder with 100 shares has $5,000. b. Tomorrow’s price = $50 - $1 = $49 (ex-dividend price).
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  • Winter '12
  • VincentGregoire
  • Dividend, Dividend yield

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