Textbook Notes (369,205)
Canada (162,462)
Finance (37)
MGFC10H3 (13)
Derek Chau (13)
Chapter 19

Chapter 19 Notes

2 Pages
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Department
Finance
Course Code
MGFC10H3
Professor
Derek Chau

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Chapter 19 Dividends and Other Payouts Notes191 Different Types of Dividendsregular cash dividendscash payments by a firm to its shareholders usually four times a yearstock dividendpayment of a dividend in the form of stock rather than cash a stock dividend comes from treasury stock increasing the number of shares outstanding and reduces the value of each sharestock splitthe increase in the number of outstanding shares of stock while making no change in shareholders equity193 The Benchmark Case An Illustration of the Irrelevance of Dividend PolicyCurrent Policy Dividends Set Equal to Cash Flowthe NPV of the firm can be calculated by discounting these dividendsthe firms value can be expressed asVDIVDIV1r001SThe Indifference PropositionMM makes the following assumptions1There are neither taxes nor brokerage fees and no single participant can affect the market price of the security through his or her trades Economists say that perfect markets exist when these conditions are met2All individuals have the same beliefs concerning future investments profits and dividends3The investment policy of the firm is set ahead of time and is not altered by changes in dividend policyHomemade Dividendshomemade dividendsan individual investor can undo corporate dividend policy by reinvesting excess dividends or selling off shares of stock to receive a desired cash flowmany corporations assist their shareholders in creating homemade dividend policies by offering automatic dividend reinvestment plans which allows shareholders have option of automatically reinvesting some or all of their cash dividend in shares of stockstripped common sharesentitle shareholders to receive either all the dividends from one or a group of wellknown companies or an instalment receipt that packages any capital gain in the form of a call optionthe call option gives the investor the right to buy the underlying shares at a fixed price and so is valuable if the shares appreciate beyond that price and the implications can be summarized in 2 sentences1By varying dividend policy the managers can achieve any payout along the diagonal line2Either by reinvesting excess dividends at date 0 or by selling off shares of stock at this date any individual investor can achieve any net cash payout along the diagon
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