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Dividend Payouts
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3 Nov.
4 Nov.
6 Nov.
7 Dec.
Declaration
Date
ExCumdividend dividend
Date
Date
Record
Date
Payment
Date
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-2
-1
+1
+2
$P
$P - div
The price drops
Exby the amount of
dividend
Date
the cash
dividend Taxes complicate things a bit. Empirically, the
price drop is less than the dividend and occurs
within the first few minutes of the ex-date.
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Homemade Dividends
Bianchi Inc. is a $42 stock about to pay a $2 cash
dividend.
Bob Investor owns 80 shares and prefers a $3 cash
dividend.
Bobs homemade dividend strategy:
Sell 2 shares ex-dividend
homemade dividends
Cash from dividend
$160
Cash from selling stock
$80
Total Cash
$240
Value of Stock Holdings $40 78 =
$3,120
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$3 Dividend
$240
$0
$240
$39 80 =
$3,120
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$39
$3,360 80 shares
$240
share
After a $2 dividend, and sale of 2 ex-dividend shares,his
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Assets
A.Original balance sheet
Cash
$150,000 Debt
0
Other assets
850,000 Equity
1,000,000
Value of Firm 1,000,000 Value of Firm 1,000,000
Shares outstanding = 100,000
Price per share= $1,000,000 /100,000 = $10
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$50,000
Debt
Other assets
850,000
Equity
900,000
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Liabilities& Equity
Cash
$50,000 Debt
0
Other assets 850,000 Equity
900,000
Value of Firm 900,000 Value of Firm 900,000
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Share Repurchase
Lower tax (but the IRS is watching)
Tender offers
If offer price is set wrong, some stockholders lose.
Open-market repurchase
Repurchase as investment
Studies have shown that the long-term stock price
performance of securities after a buyback is significantly
better than the stock price performance of comparable
companies that do not repurchase.
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Investment Bankers
Firm
Cash in from
stock issue
Cash out to
dividends
Taxes
Gov.
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Stock
Holders
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Resolution of Uncertainty
It would be erroneous to conclude that increased
dividends can make the firm less risky.
A firms overall cash flows are not necessarily
affected by dividend policyas long as capital
spending and borrowing are not changed.
Thus, it is hard to see how the risks of the overall
cash flows can be changed with a change in
dividend policy.
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Tax Arbitrage
Investors can create positions in high dividend-yield
securities that avoid tax liabilities.
Thus, corporate managers need not view dividends
as tax-disadvantaged.
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Agency Costs
Agency Cost of Debt
Firms in financial distress are reluctant to cut dividends. So, rather
than saving the cash to pay their debts, they continue to issue
dividends to stockholders (= a transfer of wealth from debt- to
equity-holders).
To protect themselves, bondholders frequently create loan
agreements stating dividends can only be paid if the firm has
earnings, cash flow, and working capital above pre-specified levels.
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Group
High Tax Bracket Individuals
Low Tax Bracket Individuals
Tax-Free Institutions
Corporations
Stock
Zero to Low payout stocks
Low-to-Medium payout
Medium Payout Stocks
High Payout Stocks
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