Ch 17 Corporate Finance

Four Types of 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 will not be repeated

•Liquidating dividend – some or all of the business has been sold

Declaration Date

Board Declares dividend and it becomes a liability to the firm

Ex-dividend date

Occurs 2 business days before date of record

If you buy a stock after this, then you will not receive dividends

Stock Price generally drops by amount of dividend

Date of Record

holders of record are determined, and they will receive the dividend payment

Date of Payment

checks are mailed

Do dividends or dividend policies 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.

Why might a low payout be desirable?

Individuals in upper income tax brackets might prefer lower dividend payouts, given the immediate tax liability, in favor of higher capital gains with the deferred tax liability.

Flotation costs – low payouts can decrease the amount of capital that needs to be raised, thereby lowering flotation costs.

Dividend restrictions – debt contracts might limit the percentage of income that can be paid out as dividends.

Why might a high payout be desirable?

Dividend Signals

Stock Repurchases

Similar to a cash dividend

Stock repurchases send a positive signal that management believes the current price is low.

Stock price often increases when announced