Fundamentals of Corporate Finance Third edition Chapter 16 Dividend Brealey Myers Marcus Policy ndamentals of Corporate Finan Brealey Myers Marcus slides by Matthew will IrwinMcGraw-Hill CThe McGraw-Hill Companies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 16- 1 Irwin/McGraw-Hill Chapter 16 Fundamentals of Corporate Finance Third Edition Dividend Policy Brealey Myers Marcus slides by Matthew Will Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc.,2001
16-2 Topics Covered SHow Dividends are Paid SHow Do Companies decide on dividend Payments sWhy Dividend Policy Should Not matter SWhy Dividends May Increase Firm Value S Why Dividends May reduce Firm value Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 16- 2 Irwin/McGraw-Hill Topics Covered How Dividends are Paid How Do Companies Decide on Dividend Payments Why Dividend Policy Should Not Matter Why Dividends May Increase Firm Value Why Dividends May Reduce Firm Value
16-3 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 Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 16- 3 Irwin/McGraw-Hill Dividend Payments Record Date - Person who owns stock on this date received the dividend. 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. Cash Dividend - Payment of cash by the firm to its shareholders
16-4 Dividend payments Stock dividend -Distribution of additional shares to a firm's stockholders Stock Splits- Issue of additional shares to firm's stockholders Stock Repurchase- Firm buys back stock from its shareholders Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 16- 4 Irwin/McGraw-Hill Dividend Payments Stock Repurchase - Firm buys back stock from its shareholders. Stock Dividend - Distribution of additional shares to a firm’s stockholders. Stock Splits - Issue of additional shares to firm’s stockholders
16-5 Dividend payments Jul 28 Aug 10 Aug l1 Aug 13 Sept 1o Declaration With EX-dividend Record Payment date dividend date date date date Share price falls Irwin/McGraw-Hill CThe McGraw-Hill Companies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 16- 5 Irwin/McGraw-Hill Dividend Payments Jul 28 Aug 10 Aug 11 Aug 13 Sept 10 Declaration With- Ex-dividend Record Payment date dividend date date date date Share price falls
16-6 Stock dividend Example -Amoeba Products has 2 million shares currently outstanding at a price of $15 per share The company declares a 50% stock dividend. How many shares will be outstanding after the dividend is paid? Answer 2 mil x 50=1 mil +2 mil =3 mil shares Irwin/McGraw-Hill CThe McGraw-Hill Companies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 16- 6 Irwin/McGraw-Hill Stock Dividend Example - Amoeba Products has 2 million shares currently outstanding at a price of $15 per share. The company declares a 50% stock dividend. How many shares will be outstanding after the dividend is paid? Answer 2 mil x .50 = 1 mil + 2 mil = 3 mil shares
16-7 Stock dividend Example -cont- After the stock dividend what is the new price per share and what is the new value of the firm? Answer O The value of the firm was 2 mil x $15 per share,or S30 mil. After the dividend the value will remain the same O Price per share=$30 mil /3 mil sh=$10 per sh Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 16- 7 Irwin/McGraw-Hill Stock Dividend Example - cont - After the stock dividend what is the new price per share and what is the new value of the firm? Answer The value of the firm was 2 mil x $15 per share, or $30 mil. After the dividend the value will remain the same. Price per share = $30 mil / 3 mil sh = $10 per sh
16-8 Stock Repurchase Example- Cash dividend versus share repurchase Assets Liabilities& equity A. Original balance sheet Cash $150,000Debt Other assets 850,000 Equity ,000,000 Value of Firm 1.000.000 Value of Firm 1.000.000 Shares outstanding= 100,000 Price per share=$1,00000/100,000=$10 Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 16- 8 Irwin/McGraw-Hill Stock Repurchase Assets Liabilities & Equity 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 Example - Cash dividend versus share repurchase
16-9 Stock Repurchase Example- Cash dividend versus share repurchase Assets Liabilities& 2 Equi的 B. After cash dividend Cash $50,000Debt Other assets 850.000 Equity 900.000 Value of Firm 900,000 Value of Firm 900,000 Shares outstanding= 100,000 Price per share=$900,000/100,000=$9 Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 16- 9 Irwin/McGraw-Hill Stock Repurchase Assets Liabilities & Equity B. After cash dividend Cash $50,000 Debt 0 Other assets 850,000 Equity 900,000 Value of Firm 900,000 Value of Firm 900,000 Shares outstanding = 100,000 Price per share = $900,000 / 100,000 = $9 Example - Cash dividend versus share repurchase
16-10 Stock Repurchase Example- Cash dividend versus share repurchase Assets Liabilities Equity C. After stock repurchase Cash $50,000Debt Other assets 850,000 Equity 900.000 Value of Firm 900,000 Value of Firm 900,000 Shares outstanding=90,000 Price per share=$900,000/90,000=$10 Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 16- 10 Irwin/McGraw-Hill Stock Repurchase Assets Liabilities & Equity C. After stock repurchase Cash $50,000 Debt 0 Other assets 850,000 Equity 900,000 Value of Firm 900,000 Value of Firm 900,000 Shares outstanding = 90,000 Price per share = $900,000 / 90,000 = $10 Example - Cash dividend versus share repurchase