LT Lecture 3 - Payout Policy

Question 1

Definitions:

1) Cash Dividend
2) Stock Dividend

Answer 1

Question 2

Explain dividend timing

Answer 2

• Announcement Date - Firm states dividend amount
• Payment Date - Day on which dividends are paid 􏰁Record Date 􏰊 Person who owns stock on this date receives the dividend
• Ex-Dividend Date - The first day the stock trades without the dividend
• Cum-Dividend Date - Day before the ex-dividend day

Question 3

Define and explain stock repurchase

Answer 3

Question 4

**State the list the assumptions of Miller-Modigliani Theorem (M&M)

Answer 4

Question 5

State the formula for dividend change

Answer 5

Question 6

Managers: dividend policy is relevant

M&M: devidend policy is irrelevant

Why is dividend policy relevant?

Relax M&M assumptions

Answer 6

1) Investment may not be held constant
2) There are transaction costs
3) Capital markets are not efficient
4) Managers preferences differ from shareholders’ preferences
5) Taxes are not equivalent

Question 7

How much should the price drop on the dividend day?

Answer 7