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.
You might also like to view...
Inca Company purchases a call option to hedge an investment of 20,000 shares of Limbaugh Company stock. The option agreement provides that if the prices of a share of Limbaugh Company stock is greater than $30 on October 25, Inca receives the difference (multiplied by 20,000 shares). Alternatively, if the price of the stock is less than $30, the option is worthless and will be allowed to expire
Which of the following statements regarding this call option is correct? a. The call option effectively hedges the investment in the shares of Limbaugh stock. b. The call option is an option to sell Limbaugh Company stock at a fixed price. c. The call option represents a speculative option rather than a hedge. d. Inca could have purchased a put option or a call option to effectively hedge the investment in the shares of Limbaugh stock.
What are the primary issues that Citigroup should have considered before the merger?
What will be an ideal response?
Visit your favorite local restaurant (fast-food or otherwise) and draw a basic process flowchart for the food ordering, preparation, and delivery. Are there portions of these processes that do not appear to add value to the process? How could these be eliminated or reduced?
What will be an ideal response?
How do the eight key supply chain processes drive successful process integration?
What will be an ideal response?