Chapter 15 Distributions to Shareholders: Dividends and Share Repurchases 533 ex-dividend date. Thus, if Katz closed at $30.50 on December 3, it would prob. Payment Date ably open at about $30 on December 4. The date on which a firm 4. Payment date. The company actually mails the checks to the holders of record actually mails dividend checks. on January 2, the payment date. SelfTest Explain the logic of the residual dividend model, the steps a firm would take to implement it, and the reason it is more likely to be used to establish a long-run pay out target than to set the actual year-by-year payout ratio. How do firms use long-run planning models to help set dividend policy? Which are more critical to the dividend decision, earnings or cash flow? Explain. Explain the procedures used to actually pay the dividend. What is the ex-dividend date, and why is it important to investors? A firm has a capital budget of $30 million, net income of $35 million, and a target capital structure of 45% debt and 55% equity. If the residual dividend policy is used, what is the firm's dividend payout ratio? (52.86%) 15-4 Dividend Reinvestment Plans holders can feday most wo types During the 1970s, most large companies instituted dividend reinvestment plans Dividend Reinvest (DRIPs), under which stockholders can automatically reinvest their dividends in ment Plans (DRIP) the stock of the paying corporation. Today most large companies offer DRIP Plans that enable stock but participation rates vary considerably. There are two types of DRIP: (1) plans holders to automat that involve only old, already outstanding stock and (2) plans that involve newly cally reinvest dividends issued stock. In either case, the stockholder must pay taxes on the amount of the received back into the dividends even though stock rather than cash is received stocks of the paying firms Under both types of DRIPS, stockholders choose between continuing to receive dividend checks versus having the company use the dividends to buy Tax effects cause the price decline on average to be less than the full amount of the dividend you bought Kate's stock on December 3 you would receive the dividend, but you would almost immediately pay 150 . you were a high-income back taxpayer of intes. These would want to wait until Decreto buy the youthocho t it for so less per share Your reaction and that of others would influence stock prices around dividend payment dates. Here is what would happen 1. Other things held constant, a stock's price should rise during the quarter, with the daily price Increase for Katequal to 0.50/900 . Therefore if the price started at $20 just after its last ex dividend dat it would rise to on December 2 In the absence of taxes, the stock's price would fall to $30 on December and then startups the next dividend accrual period becam. These time everything was held constant the stock's price waswooth was placed on a graph Because of tave the price we i ther by the full amount of the dividende fall by the full dividend amount when it goes en dividend The amount of these and subsequent fall would be the Dividend -T), where generally T -15% the tax rate on individual dividends (unless you are a high-income bracket taxpayer then T-209 See Edwin J.Elton and Martin Gruber, "Marginal Stockholder Tax Rates and the Clientele Effect Review of Economics and Statistics, vol. 5 no 3 (February 1970. pp. 68-7 for an interesting disc sion of the subject See Richard H. Pethway and Phil Malone Dividend R est as Men , vol 2 (Winter 1973. pp. 11-18 for an old but still excellent discussion of the subject Chapter 15 Distributions to Shareholders: Dividends and Share Repurchases 533 ex-dividend date. Thus, if Katz closed at $30.50 on December 3, it would prob. Payment Date ably open at about $30 on December 4. The date on which a firm 4. Payment date. The company actually mails the checks to the holders of record actually mails dividend checks. on January 2, the payment date. SelfTest Explain the logic of the residual dividend model, the steps a firm would take to implement it, and the reason it is more likely to be used to establish a long-run pay out target than to set the actual year-by-year payout ratio. How do firms use long-run planning models to help set dividend policy? Which are more critical to the dividend decision, earnings or cash flow? Explain. Explain the procedures used to actually pay the dividend. What is the ex-dividend date, and why is it important to investors? A firm has a capital budget of $30 million, net income of $35 million, and a target capital structure of 45% debt and 55% equity. If the residual dividend policy is used, what is the firm's dividend payout ratio? (52.86%) 15-4 Dividend Reinvestment Plans holders can feday most wo types During the 1970s, most large companies instituted dividend reinvestment plans Dividend Reinvest (DRIPs), under which stockholders can automatically reinvest their dividends in ment Plans (DRIP) the stock of the paying corporation. Today most large companies offer DRIP Plans that enable stock but participation rates vary considerably. There are two types of DRIP: (1) plans holders to automat that involve only old, already outstanding stock and (2) plans that involve newly cally reinvest dividends issued stock. In either case, the stockholder must pay taxes on the amount of the received back into the dividends even though stock rather than cash is received stocks of the paying firms Under both types of DRIPS, stockholders choose between continuing to receive dividend checks versus having the company use the dividends to buy Tax effects cause the price decline on average to be less than the full amount of the dividend you bought Kate's stock on December 3 you would receive the dividend, but you would almost immediately pay 150 . you were a high-income back taxpayer of intes. These would want to wait until Decreto buy the youthocho t it for so less per share Your reaction and that of others would influence stock prices around dividend payment dates. Here is what would happen 1. Other things held constant, a stock's price should rise during the quarter, with the daily price Increase for Katequal to 0.50/900 . Therefore if the price started at $20 just after its last ex dividend dat it would rise to on December 2 In the absence of taxes, the stock's price would fall to $30 on December and then startups the next dividend accrual period becam. These time everything was held constant the stock's price waswooth was placed on a graph Because of tave the price we i ther by the full amount of the dividende fall by the full dividend amount when it goes en dividend The amount of these and subsequent fall would be the Dividend -T), where generally T -15% the tax rate on individual dividends (unless you are a high-income bracket taxpayer then T-209 See Edwin J.Elton and Martin Gruber, "Marginal Stockholder Tax Rates and the Clientele Effect Review of Economics and Statistics, vol. 5 no 3 (February 1970. pp. 68-7 for an interesting disc sion of the subject See Richard H. Pethway and Phil Malone Dividend R est as Men , vol 2 (Winter 1973. pp. 11-18 for an old but still excellent discussion of the subject