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Contents
1. Introduction
2. Dividends: Forms
1. Introduction
Owners/ Equity holders
$$$
Dividends
Share Repurchases
$$$
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2. Dividends: Forms
1. Regular Cash Dividends
2. Extra or Special (Irregular) Dividends
Shareholders
get money
3. Liquidating Dividends
4. Stock Dividends
Shareholders
get more shares
5. Stock Splits
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Cash to Shareholders
Regular Cash Dividends
Cash distributed to shareholders on a regular
schedule
Most dividend paying companies strive to
maintain or increase their dividends
Increasing dividends indicate that company is
growing and is willing to share profits
Some companies offer dividend reinvestment
plans
Dividend policy and payout ratio (Example 1)
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Cash to Shareholders
Extra or Special (Irregular) Dividends
Dividend paid by a company which does not
normally pay dividends or a payment to
shareholders which supplements regular
cash dividends
Liquidating Dividends
Assets sold, liabilities settled and proceeds
distributed to shareholders
Dividends paid which exceed accumulated
retained earnings
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Stock Splits
With a 2 for 1 split each share is split into two;
economically similar to a 100% stock dividend
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After Dividend
Shares outstanding
1,000,000
1,100,000
EPS
0.91
Stock price
10
9.09
P/E
10
10
10,000,000
10,000,000
Shares owned
500
550
Ownership value
5000
5000
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Declaration
Date
Ex-Dividend
Date
Holder-of-record
Date
Payment
Date
Examples 3 and 4
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4. Share Repurchases
Company buys back its own shares: treasury shares or treasury stock
Not considered for dividends, voting or computing EPS
Buy in the open market: gives flexibility because the company can time the
buyback
Fixed price tender offer: can be accomplished quickly but company usually
has to offer a premium; pro-rata if necessary
Dutch Auction: tender offer with range of acceptable prices; for example, if
shares are trading at $50, a company would offer to buy back 2 million
shares in the 51 53 range; can be accomplished quickly, usually at a price
lower than a fixed price tender offer
Repurchase by direct negotiation: usually with large shareholder; wealth
transfer from average shareholder to the large shareholder
Example 5
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Example: A company has 1 million shares outstanding and the net income is $10
million. The share price is $20. Cash not needed for business operations is $5 million.
This money is invested and the return is 4%, after tax. What is the impact on EPS if $5
million is used to buy back shares.
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Example: A company has 1 million shares outstanding and the net income is $2
million. The share price is $20. The company borrows $5 million at an after-tax rate
of 12% in order to buy back shares. What is the impact on EPS?
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Summary
Types of Dividends
Payment Chronology
Share Repurchases
Liquidity Ratios
Solvency Ratios
EPS
BVPS
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Conclusion
Read summary
Review learning objectives
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