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FINS1613 Lecture Notes - Lecture 12: Dividend Policy, Cash Flow, Capital Market

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UNSW, UNSW Sydney
Department
Finance
Course
FINS1613
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All

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Document Summary

Payout policy is the way a firm chooses between the alternative ways to pay cash out to shareholders: If the firm chooses to pay out/distribute, it can do so by either paying dividends or repurchasing shares. If the firm chooses to retain the cash flow, it will invest in new projects now or add to cash reserves to fund future investments. The order is: deceleration date, ex-dividend date, record date, payable date. On the ex-dividend date, the share price will decline by the amount of the dividend. A company will announce it will conduct repurchases (however not obligated to do so). The repurchases then generally occur over a period of time (not affecting stock price). Dividends vs share repurchases in a perfect capital market. In a perfect capital market, when the dividend is paid, share price drops by that amount when the stock begins to trade ex-dividend. The price drops because it only reflects dividends in subsequent years.

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Related Questions

Determining the Ex-Dividend Date. On Tuesday, December 8, Lippincott Power Co.’s board of directors declares a dividend of 75 cents per share payable on Tuesday, January 26, to shareholders of record as of Tuesday, January 12. What is the ex-dividend date? If a shareholder buys stock before that date, who gets the dividends on those shares, the buyer or the seller?

25. If a merger is done for __________ reasons, then the combined corporation will be worth more than the two individual corporations (2+2 = 5).

  1. Expropriation
  2. Synergy
  3. Hubris
  4. Wealth Redistribution

26. A(n) __________ is when a parent company sells shares of a subsidiary to the public.

  1. Divestiture
  2. Leveraged Buyout
  3. Joint Venture
  4. Equity Carveout

27. Antitakeover measures primarily protect ______________.

  1. Acquiring firm managers
  2. Acquiring firm shareholders
  3. Target firm shareholders
  4. Target firm managers

28. If investors prefer dividends to capital gains (Bird in the Hand theory is true), then

  1. The cost of equity will decrease as the retention ratio increases
  2. The cost of equity will decrease as the payout ratio decreases
  3. The cost of equity will increase as the retention ratio decreases
  4. The cost of equity will increase as the payout ratio decreases

29. _______________ are when the firm buys back a set number of shares on a set date for a specific price.

  1. Dividend Reinvestment Plans
  2. Tender Offers
  3. Dutch auctions
  4. Clientele Repurchases

30. Any signaling effect of dividends should occur on the ______________.

  1. Declaration Date
  2. Ex-Dividend Date
  3. Record Date
  4. Payment Date

31. Which statement is TRUE?

  1. Dividend rights say that shareholders get any remaining assets after all creditors have been paid in bankruptcy
  2. According to financial theory, shareholder wealth should be unaffected by a two-for-one stock split.
  3. A stock split is a large stock dividend so that you might have twice as many shares with each share being worth half as much.
  4. The stock price should fall by the amount of the dividend on the ex-dividend date.

32. Which statement is FALSE?

  1. In a Stock Swap, the acquiring firm issues shares of stock in order to pay for the acquisition
  2. A conglomerate merger is between unrelated firms
  3. A Leveraged Buyout involves creating a new company out of part of your company and then selling shares of the new company to the public.
  4. In an asset purchase, the acquiring firm does not assume the liabilities of the target firm.

33. Suppose that prior to a merger the stock price of the target company was $50 and the stock price of the acquiring company was $40. If the acquiring firm agrees to pay 1.5 share of their stock for every share of the target firms stock, then what premium are they offering?

a) 10% b) 20% c) 25% d) 33%

34. Which statement is FALSE?

  1. The White Knight defense is when you try to sell yourself to a

Payout Policy & Acquisitions
1. You are employed in the Finance Division of a firm that has 232,570,000 shares outstanding. The current share price is $54.82. The forecast earnings are $1,357,460,000. Calculate the current market value of firm equity and the earnings per Share (EPS). The firm has accumulated a stockpile of $1,750,000,000 in excess cash, and the directors want to pay-out these funds to the shareholders. You have been asked to compare the effects of a special one-time dividend and a share repurchase. If the funds are paid out as a one-time dividend, what will be the (special) dividend per share (DPS)? What is the firm value after the dividend? What is the share price after the dividend? What is the EPS after the dividend? If the firm executes a share repurchase, how many shares will be purchased at what price? How many shares will remain? What is the firm value after the repurchase? What is the share price after the repurchase? What is the EPS after the repurchase?

2. Donovan Inc. is considering an acquisition of Gilhooly Corp. Donovan has 3,912,753 shares outstanding selling for $47.38. Gilhooly has 1,358,728 shares outstanding selling for $32.14. What are the market values of both firms? In a stock-for-stock offer how many shares of Donovan stock will each Gilhooly equity holder receive for his share (if they allocate purely on the basis of the current prices)? If there are no synergies, what is the value of the combined entity? How many shares will be outstanding after the acquisition? What is the value of each share? What portion of the stock will the old Donovan shareholders hold in the firm after the acquisition? Next, assume that Donovan has adequate excess-cash-on-hand to pay each shareholder of Gilhooly $9.75. If they wish to make an acquisition based on a combination of stock and cash, how many shares of Donovan stock must each Gilhooly equity holder be given to buy-out the remainder of his share beyond the $9.75? If there are no synergies, what will be the value of the combined firm (recall that each shareholder of the Gilhooly stock is being given $9.75, so the value of the firm will decline accordingly)? How many shares will be outstanding after the acquisition? What is the value of each share? What portion of the stock will the old Donovan shareholders own in the firm after the acquisition? Finally, presume that the merger will create synergies that have a present value of $27,000,000. Assume the two firms execute a straight stock-for-stock offer at the exchange ratio calculated in the first example above. What is the firm value, the number of outstanding shares, and the share price after the acquisition?