Lecture 4- The dividend decision

Dividend- [blank_start]Payment[blank_end] made out of firm’s [blank_start]earnings[blank_end] to its [blank_start]owners[blank_end], in form of either [blank_start]cash[blank_end] or [blank_start]stock[blank_end]

Distribution- [blank_start]Payment[blank_end] made by [blank_start]firm[blank_end] to its [blank_start]owners[blank_end] from sources other than [blank_start]current[blank_end] or [blank_start]accumulated retained earnings[blank_end]

Cash dividend- [blank_start]Cash payment[blank_end] made by [blank_start]firm[blank_end] to its [blank_start]owners[blank_end] in the [blank_start]normal[blank_end] course of [blank_start]business[blank_end]

Stock dividend- [blank_start]Payment[blank_end] made by a [blank_start]firm[blank_end] to its [blank_start]owners[blank_end] in the form of [blank_start]equity[blank_end], [blank_start]diluting value[blank_end] of each [blank_start]share outstanding[blank_end]

Stock split- [blank_start]Increase[blank_end] in firm’s [blank_start]shares outstanding[blank_end] without any [blank_start]change[blank_end] in [blank_start]owners’ equity[blank_end]

Standard method of cash dividend payment is [blank_start]declaration date[blank_end] followed by [blank_start]ex-dividend date[blank_end] followed by [blank_start]record date[blank_end] followed by [blank_start]payment date[blank_end]

Declaration date- [blank_start]Board of directors[blank_end] [blank_start]declares[blank_end] payment of [blank_start]dividends[blank_end]

Ex-dividend date- [blank_start]Share of equity[blank_end] becomes [blank_start]ex-dividend[blank_end] on date [blank_start]seller[blank_end] is entitled to keep [blank_start]dividend[blank_end]; under stock exchange [blank_start]rules[blank_end], shares are [blank_start]traded ex-dividend[blank_end] on & after [blank_start]second business day[blank_end] before [blank_start]record[blank_end] date

Record date- [blank_start]Declared dividends[blank_end] are distributable to [blank_start]shareholders[blank_end] of [blank_start]record[blank_end] on [blank_start]specific[blank_end] date

Payment date- [blank_start]Dividend cheques[blank_end] are mailed to [blank_start]shareholders[blank_end] of [blank_start]record[blank_end]

Around ex-dividend date, [blank_start]share price[blank_end] will fall by [blank_start]approximately[blank_end] the [blank_start]amount of dividend[blank_end] that has been [blank_start]declared[blank_end] because it makes it [blank_start]official[blank_end] that [blank_start]dividend[blank_end] will be paid to all [blank_start]shareholders[blank_end] that have bought shares before [blank_start]ex-dividend date[blank_end]

Trading range- The [blank_start]price range[blank_end] between [blank_start]highest[blank_end] & [blank_start]lowest prices[blank_end] at which an [blank_start]equity[blank_end] is traded

Reverse split- [blank_start]Stock split[blank_end] in which firm’s number of [blank_start]shares outstanding[blank_end] is [blank_start]reduced[blank_end]

Dividend policy- Refers to [blank_start]time pattern[blank_end] of [blank_start]dividend pay-out[blank_end]

Share price is [blank_start]present value[blank_end] of [blank_start]future[blank_end] dividends- shareholders will be [blank_start]indifferent[blank_end] as to how [blank_start]present value[blank_end] is made up ([blank_start]size[blank_end] of each year’s [blank_start]dividend[blank_end])

Homemade dividend policy- [blank_start]Tailored[blank_end] dividend policy created by [blank_start]individual investors[blank_end] who [blank_start]undo[blank_end] [blank_start]corporate[blank_end] dividend by [blank_start]reinvesting dividends[blank_end] or [blank_start]selling shares[blank_end]

Share repurchase- [blank_start]Purchase[blank_end], by a [blank_start]corporation[blank_end], of its [blank_start]own shares[blank_end] of equity; also known as a [blank_start]buyback[blank_end]

One approach company can follow to do share repurchase is [blank_start]open-market purchases[blank_end]. This involves [blank_start]buying shares[blank_end] like other investors but not [blank_start]declaring[blank_end] it’s [blank_start]buying[blank_end] its [blank_start]own[blank_end] shares

Another approach company can follow to do share repurchase is [blank_start]tender offer[blank_end]. This involves [blank_start]company[blank_end] going to all its [blank_start]own current shareholders[blank_end] & offering to [blank_start]buy back[blank_end] pro-rata number of [blank_start]shares[blank_end] from each of them at [blank_start]certain price[blank_end] (normally [blank_start]higher[blank_end] than market price)

Third approach company can follow to do share repurchase is [blank_start]targeted repurchase[blank_end]. This involves [blank_start]company[blank_end] going to [blank_start]selective[blank_end] number of [blank_start]shareholders[blank_end] & [blank_start]offering[blank_end] them to [blank_start]buy back[blank_end] their shares at [blank_start]certain price[blank_end]

Five real world considerations about dividend vs repurchase are: [blank_start]flexibility[blank_end], [blank_start]executive compensation[blank_end], [blank_start]offset to dilution[blank_end], [blank_start]undervaluation[blank_end] & [blank_start]taxes[blank_end]

Three real world factors affecting dividend pay-out that favour low-dividend pay-out are: [blank_start]taxes[blank_end], [blank_start]flotation costs[blank_end] & [blank_start]dividend restrictions[blank_end]

Two real world factors affecting dividend pay-out that favour high-dividend pay-out are: [blank_start]desire for current income[blank_end] & [blank_start]tax exempt investors[blank_end]

Information content of dividends- [blank_start]Market’s reaction[blank_end] to change in [blank_start]corporate dividend pay-out[blank_end]

Clientele effect- [blank_start]Observable fact[blank_end] that equities attract [blank_start]particular groups[blank_end] based on [blank_start]dividend yield[blank_end] & resulting [blank_start]tax effects[blank_end]