Dividend Payout Policy

Lecture 5

How Corporations Pay out Cash to shareholders

Cash Dividend Share Repurchase

Key Dates

Declaration Date Record Date Ex-dividend date

Without dividend. Buyer of a stock after the exdividend date does not receive the most recently declared dividend.

Payment Date

KO Company
Cash Amount ($)
0.255

Declarati Record on Date Date

10/18/2012 11/30/2012

Ex Date

Payment Date
12/17/2012

11/28/2012

0.255

7/30/2012

9/14/2012

9/12/2012

10/1/2012

0.51

4/26/2012

6/15/2012

6/13/2012

7/1/2012

Stock Dividends and Stock Split

Stock Dividend

Distribution of additional shares to a firms stockholders. E.g the firm could declare a stock dividend of 10%. Issue of additional shares to firms stockholders. E.g a two for one stock split, each investor would receive one additional share for each share already held.

Stock Split

Stock Dividend Example

Assume the Board of Directors of XYZ Company authorizes a 10% stock dividend on May 20th, when the stock is selling for $20 per share. Before the dividend, the company's balance sheet had the following stockholders' equity section: Common Stock, $3 par value(500,000 shares issued and outstanding) $1,500,000 Additional Paid-in-Capital 6,000,000 Retained Earnings 2,325,000 Total stockholders' equity $9,825,000

Solution

Shares to be issued (0.1*500,000)= 50,000 Value of the dividend (50,000*20)= $1 Mill. Retained Earning Reduced by $1Million Common Stock increased by $150,000 (3*50,000) Additional Paid in Capital Increased by $850,000 (50,000 ($20 $3)

Balance Sheet Common Stock, $3 par value(550,000 shares issued and outstanding) $1,650,000 Additional Paid-in-Capital 6,850,000 Retained Earnings 1,325,000 Total stockholders' equity 9,825,000 Do with 15% stock dividend.

Stock Split

Let's assume XYZ Corp, which has two million shares outstanding, is trading for $30. The company announces a two for one stock split.

Solution

New number of shares= 2million*2= 4Mill Price of share after split=30/2=$15 Market Capitalization after split=15*4= $60Mill

Reference

Brealy, Myers, Marcus, Fundamentals of Corporate Finance, 6th Edition. Chapter 17