In a world without taxes or transaction costs, it can be argued that dividend policy is irrelevant for shareholder value and cash flow. With a no-dividend policy, the current price is and will remain $100.00 per share

With a high-dividend policy, the current price is $100.00 per share and the value falls to $95 per share upon payment of the dividend.

Use the following example to demonstrate dividend policy irrelevance.

No-dividend Policy High-dividend Policy
5,000 shares owned 5,000 shares owned
$100.00 current price per share $100.00 current price per share
$0.00 dividends per share $5.00 dividends per share
$25,000 desired cash flow per year $25,000 desired cash flow per year
What will be an ideal response?


Answer: No-dividend policy: Sell 250 shares of stock at $100 per share and receive $25,000 in cash. The remaining stock has a value of (5000 - 250) shares × $100 per share = $475,000. Total value = $475,000 in stock + $25,000 in cash = $500,000.
High-dividend policy: Receive $25,000 cash from the dividends of $5.00 per share × 5,000 shares. The remaining stock has a value of 5,000 shares × $95.00 per share = $475,000. Total value = $475,000 in stock + $25,000 in cash = $500,000.

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