COMMERCE 3FA3 Study Guide - Midterm Guide: Secured Loan, Greenmail, Leaseback

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Midterm 2: Formula Sheet | Asimah Mahmood
Chapter 17: Dividends & Dividend Policy
Declaration Date – BOD passes a resolution authorizing payment of a dividend to shareholders.
Ex-Dividend Date – The date before which a new purchaser of stock is entitled to receive a declared dividend, but on or after which she
does not receive the dividend.
Date of Record – The date by which a stockholder must be registered on the firm’s roll as having share ownership in order to receive a
declared dividend. | The day on which the owners of a firm are ascertained for dividend purpose.
Date of Payment – The date on which the firm mails out its declared dividends.
Residual Dividend Policy
Based on the premise that maintaining a predictable dividend payout is not a primary obj.
D/E x Net Income = Debt Increase
Funds Available = Net income + Debt Increase
Stock Repurchase
An alternative to a cash dividend payment by the firm from its earnings to the shareholders, achieved by the firm buying some of its
outstanding stock on the market. | If a firm has excess cash and management believes the firm’s shares are currently undervalues by
market participants.
Price/Share = (Equity – Repurchase $) / (New Shares O/S)
Shares Bought = Repurchase $ / (Price/Share)
New Shares O/S = Shares O/S – Shares Bought
Stock Dividends
A payment made by the firm to its owners in the form of new shares of stock, rather than cash. | When a firm is short of cash yet it wishes
to distribute something to shareholders it should consider issuing this.
# of shares O/S = total shares x (1+div %) New Price = old price x ( 1 / (1 + div %)
P0 = equity / # of shares New Shares O/S = # of shares (1 + div %) Px = equity / new # of shares
Dividend Payout Ratio = annual dividend / EPS
Residual Dividend Approach: A policy under which the firm pays dividends only after its capital investment needs are met, and while
maintaining a constant d/e ratio. | A payment to shareholders that…is paid only from funds remaining after all positive net present value
projects have been funded.
Value of a Share Stock Today
PV of Dividends =
P0 = D1 + D2
(1+R) (1+R)2
Dividend Yield =
$ Dividend / $ Price of Stock
**Stock price tomorrow will
drop by the amount of the
dividend.
Net Income =
EPS x # of share total
Share Price Before Dividend Is
Paid =
Market Value of Equity /
# of shares
Share Price After Div. Paid =
Old Price - Dividend
EPS =
Net Income / New # of shares
O/S
Total Dividends Paid =
$ price of dividend x # of shares
O/S
P/E Ratio =
Price / EPS
Retention Ratio +
Dividend Payout Ratio = 1
After Tax Price =
Before Tax Price – After Tax Div
After Tax Dividend =
(1 – Tc) x Pre Tax Dividend
Total New Financing Possible =
Earnings for Yr +
Earnings For Yr (D/E)
Needed Equity =
Planned Outlays x E%
Total Capital Outlays =
Planned Outlays +
Needed Equity
Dividend =
Earnings for Yr – Needed Equity
Earnings Portion of Capital
Outlays =
Shares O/S (EPS – (div/share))
Ex – Dividend Price
(Po – Px) = (1-Tp)(1-Tg)
D
Tg = effective marginal tax rate
on capital gains
Tp = relevant marginal personal
tax rate on dividends
After Tax Return =
g + D (1-t)
Pretax Return =
g + D
Stock Splits
An increase in the firm’s number of shares O/S without any change in owner’s equity. | The term given to an event that causes the value of
a stock to decline by two-thirds while the total market value of the equity remains constant.
Ex. 5 for 1: Old Equity = total shares x old price New Equity= shares O/S x price
# of shares O/S = total shares x (5/3) Price/Share = old price x (3/5)
Reverse Splits:
The number of shares o/s decreases, but owner’s equity is unchanged. | The issuance of 1 new share of stock to replace 3 O/S shares. |
To avoid falling below the minimum listing requirements of a stock exchange.
Ex. 4 for 7 # shares O/S = total shares x 4/7 Price/Share = old price x (7/4)
Homemade Dividend Policy: The ability of shareholders to undo the dividend policy of the firm and create an alternative dividend
payment policy via reinvesting dividends or selling shares of stock.
Information Content Effect: The market’s reaction to the announcement of a change in the firm’s dividend payout.
Clientele Effect: The observed empirical fact that stocks attract particular investors based on the firm’s dividend policy and the resulting
tax impact on investors. | Stocks…attract certain inventory groups based on the dividend yield and the tax effects. | It is more likely that
dividend policy is irrelevant
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Document Summary

Declaration date bod passes a resolution authorizing payment of a dividend to shareholders. Ex-dividend date the date before which a new purchaser of stock is entitled to receive a declared dividend, but on or after which she does not receive the dividend. Date of record the date by which a stockholder must be registered on the firm"s roll as having share ownership in order to receive a declared dividend. | the day on which the owners of a firm are ascertained for dividend purpose. Date of payment the date on which the firm mails out its declared dividends. Based on the premise that maintaining a predictable dividend payout is not a primary obj. Funds available = net income + debt increase. An alternative to a cash dividend payment by the firm from its earnings to the shareholders, achieved by the firm buying some of its outstanding stock on the market.