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Lecture note Essentials of corporate finance – Chater 14: Dividends and dividend policy

In this chapter, you will: Understand dividend types and how they are paid, understand the issues surrounding dividend policy decisions, understand the difference between cash and share dividends, understand why share repurchases are an alternative to dividends. | 14- Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 14- Key Concepts and Skills Understand: Dividend types and how they are paid The issues surrounding dividend policy decisions The difference between cash and stock dividends Why share repurchases are an alternative to dividends 14- Chapter Outline 14.1 Cash Dividends and Dividend Payment 14.2 Does Dividend Policy Matter? 14.3 Establishing a Dividend Policy 14.4 Stock Repurchase: An Alternative to Cash Dividends 14.5 Stock Dividends and Stock Splits 14- Cash Dividends Regular cash dividend = cash payments made directly to stockholders, usually each quarter Extra cash dividend = indication that the “extra” amount may not be repeated in the future Special cash dividend = similar to extra dividend, but definitely won’t be repeated Liquidating dividend = some or all of the business has been sold Return to Quick Quiz 14- Dividend Payment Chronology Declaration Date | 14- Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 14- Key Concepts and Skills Understand: Dividend types and how they are paid The issues surrounding dividend policy decisions The difference between cash and stock dividends Why share repurchases are an alternative to dividends 14- Chapter Outline 14.1 Cash Dividends and Dividend Payment 14.2 Does Dividend Policy Matter? 14.3 Establishing a Dividend Policy 14.4 Stock Repurchase: An Alternative to Cash Dividends 14.5 Stock Dividends and Stock Splits 14- Cash Dividends Regular cash dividend = cash payments made directly to stockholders, usually each quarter Extra cash dividend = indication that the “extra” amount may not be repeated in the future Special cash dividend = similar to extra dividend, but definitely won’t be repeated Liquidating dividend = some or all of the business has been sold Return to Quick Quiz 14- Dividend Payment Chronology Declaration Date – Board declares the dividend and it becomes a liability of the firm Ex-dividend Date Occurs two business days before date of record If you buy stock on or after this date, you will not receive the upcoming dividend Stock price generally drops by approximately the amount of the dividend Date of Record – holders of record are determined, and they will receive the dividend payment Date of Payment – checks are mailed Return to Quick Quiz 14- The Ex-Dividend Day Price Drop Figure 14.2 14- Does Dividend Policy Matter? Dividends matter The value of the stock is based on the present value of expected future dividends Dividend policy may not matter Dividend policy is the decision to pay dividends versus retaining funds to reinvest in the firm In theory, if the firm reinvests capital now, it will grow and can pay higher dividends in the future 14- Illustration of Irrelevance Wharton Corporation All equity firm with 100 shares outstanding Investors require a 10% return.