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Corporate Finance Chapter6
Corporate Finance Chapter6
1. INTRODUCTION
A dividend is a pro rata distribution to shareholders that is declared by the
companys board of directors and may or may not require approval by
shareholders.
A repurchase of stock is a distribution in the form of the company buying back
its stock from shareholders.
The board of directors determines the companys payout policy.
Cash dividends and share repurchases are both methods of distributing cash
to shareholders.
- The effects on financial ratios and on shareholders investment returns are
different between these two methods.
- These distributions may provide information about the companys future
prospects.
- Issuing companies cannot deduct distributions to shareholders for tax
purposes.
2. DIVIDENDS: FORMS
Cash Distributions
Noncash
Distributions
Regular Cash
Dividend
Stock Dividend
Extra Dividend
Stock Split
Liquidating Dividend
The shares provided in exchange for the cash dividends may be acquired in
the open market by the issuer or may be newly issued shares.
Advantages to the issuer:
- Encourage owners with smaller holdings to accumulate shares.
LIQUIDATING DIVIDENDS
A liquidating dividend is a distribution of cash to shareholders when
- Going out of business, or
- Selling a portion of the business, or
- Paying a dividend when retained earnings are not positive.
STOCK DIVIDENDS
A stock dividend is the distribution of additional shares of stock to
shareholders on a pro rata basis.
STOCK SPLITS
A stock split is a proportionate increase in the number of shares outstanding.
Stated in the following form:
Number of new shares : Number of old shares
So, 2:1 means that for each share held before the split, the shareholder holds
two shares after the split.
Stock splits do not affect the dividend yield or the dividend payout ratio.
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Declaration
Date
Ex-Dividend
Date
Holder-ofRecord Date
Payment Date
Corporation
Issues
Dividend
Declaration
Established by
Markets Based on
the Trade
Settlement Cycle
Established by
Corporation as
Date of
Ownership of
Stock
Established by
Corporation as
Date the
Dividend Is
Actually Paid
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4. SHARE REPURCHASES
A share repurchase is the transaction in which the stock issuer buys back its
shares from investors.
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Fixed Price
Tender Offer
Dutch Auction
Tender Offer
Direct
Negotiation
Use brokers to
buy shares.
Method provides
flexibility for the
company.
Specify the
number of
shares and the
share price.
Buy pro rata if
oversubscribed.
Specify the
number of
shares and the
range of prices.
Shareholders
determine the
number of
shares they will
sell back and
specify the price
within the range.
Negotiate with a
specific
shareholder.
Method may be
used to prevent
activist
shareholder
from getting on
board.
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Scenario 2:
Scenario 1:
Net income = $3 $16 million = $48 million
EPSScenario 1 = $48 million (16 million 4 million) = $4 per share
Scenario 2:
Net income = $3 16 million (0.07 $100 million) = $41 million
EPSScenario 2 = $41 million (16 million 4 million) = $3.41 per share
Copyright 2013 CFA Institute
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5. CONCLUDING REMARKS
Share repurchases have a positive effect on share prices.
Dividend initiations have a positive effect on share prices.
Dividend increases have a positive effect on share prices.
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6. SUMMARY
Dividends can take the form of regular or irregular cash payments, stock
dividends, or stock splits.
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SUMMARY (CONTINUED)
A share repurchase is equivalent to the payment of a cash dividend of equal
amount in its effect on shareholders wealth, all other things being equal.
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