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8. Dividend Policy Notes

Finance Notes > Corporate Finance Notes

This is an extract of our 8. Dividend Policy document, which we sell as part of our Corporate Finance Notes collection written by the top tier of University Of London (examined By LSE) students.

The following is a more accessble plain text extract of the PDF sample above, taken from our Corporate Finance Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

Dividend Policy
Relevance and Irrelevance of Dividend Policy, Asymmetric Information
Dividend (Annual or Semi-annual)
 Cash payment to the owners of corporate equity
 Basic financial inducement for individuals to hold shares
Dividend Irrelevance
 No taxes or transactions costs
 Symmetric information
 No agency costs
 Investment outcomes independent of financing decisions
Modigliani-Miller Theorem
 Irrelevancy of capital structure
 Irrelevancy of debt policy
 Irrelevancy of dividend Policy
Financing Dividend
 Net cash flow
 Share issues
 Debt borrowing
Net Cash Flow (NCF) = Cash Receipts - Cash Payments
Dividend Policy
Net Cash Flow > Dividend
 Balance = Net Cash Flow - Dividend
 Balance  Share Repurchase
Net Cash Flow = Dividend
Net Cash Flow < Dividend
 Issuing New Equity
 Borrowing Debt 1 Indifference of Investors Towards Dividends or Share Repurchases
All-equity Firm (Unlevered Firm)
V0 = Current Firm Value
V1 = Firm Value after Dividend Payment or Share Repurchase
S0 = Number of Shares Outstanding before Repurchase
S1 = Number of Shares Outstanding after Repurchase
P0 = Current Share Price (Cum-dividend Share Price)
P1 = Ex-dividend Share Price or Share Price after Repurchase
D = Dividend per Share
TDP = Total Dividend Payment
Dividend Payment
V0 = S0 x P0
P0 = V0 / S0
TDP = S0 x D
V1 = V0 - TDP
P1 = V1 / S0
P0 = D + P1
Unchanged Wealth Composition of Investors after Dividend Payment
Number of Shares of Investors = S
Wealth of Investors before Dividend = S x P0
Wealth of Investors after Dividend = S (P1 + D)
Note: P0 = D + P1
Wealth before Dividend = Wealth after Dividend
Share Repurchases
Net cash flow used to repurchase shares rather than pay dividends
Number of Shares to be Repurchased = S0.5
S0.5 = NCF / P0
S1 = S0 - S0.5
V1 = V0 - NCF
P1 = V1 / S1
Note: P0 = V0 / S0
P0 = P1


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