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Lecture 8

FINA601 Lecture Notes - Lecture 8: Dividend, Liquidating Distribution, Retained Earnings

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Week 8 Lecture 8 Chapter 19: Dividends and Other Pay-outs
Different Types of Pay-outs (19.1)
The term dividend usually refers to a cash distribution of earnings. If a distribution is
made from sources other than current or accumulated retained earnings, the term
distribution rather than dividend is used - However, it is acceptable to refer to a
distribution from earnings as a dividend and a distribution from capital as a liquidating
The most common type of dividend is in the form of cash
Many companies pay a regular cash dividend
When public companies pay dividends, they usually pay regular cash dividends four
times a year
Sometimes firms will pay a regular cash dividend and an extra cash dividend
Paying a cash dividend reduces corporate cash and retained earningsexcept in the
case of a liquidating dividend (where paid-in capital may be reduced)
Companies will often declare stock dividends
It is not a true dividend because no cash leaves the firm
Rather, a stock dividend increases the number of shares outstanding, thereby
reducing the value of each share
A stock dividend is commonly expressed as a ratio
o For example, with a 2 percent stock dividend a shareholder receives 1 new
share for every 50 currently owned.

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Other companies use stock repurchase.
An alternative form of cash pay-out is a stock repurchase
Just as a firm may use cash to pay dividends, it may use cash to buy back shares of
its stock. The shares are held by the corporation and accounted for as treasury stock
Standard Method of Cash Dividend (19.2)
The decision to pay a dividend rests in the hands of the board of directors of the
When a dividend has been declared, it becomes a liability of the firm and cannot be
easily rescinded (revoke, cancel or repeal) by the corporation
The amount of the dividend is expressed as dollars per share (dividend per share),
as a percentage of the market price (dividend yield), or as a percentage of earnings
per share (dividend pay-out)
Cash Dividend
Payment of cash by the firm to its shareholders.
Ex-Dividend Date
Date that determines whether a stockholder is entitled to a dividend payment; anyone
holding stock immediately before this date is entitled to a dividend.
Record Date
Date on which company determines existing shareholders.

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Procedure for Cash Dividend
The mechanics of a dividend payment can be illustrated by the example in Figure 19.1 and
the following chronology:
1. Declaration date:
On January 15 (the declaration date), the board of directors passes a resolution to
pay a dividend of $1 per share on February 16 to all holders of record on January 30.
2. Date of record:
The corporation prepares a list on January 30 of all individuals believed to be
stockholders as of this date. The word believed is important here: The dividend will
not be paid to individuals whose notification of purchase is received by the company
after January 30
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