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Reading 38: Dividends and Share Repurchase - Basic (Chronology of dividend…
Reading 38: Dividends and Share Repurchase - Basic
Dividends types
Cash dividends
cash payment from a company to shareholder;
its reduces both the company assets and market value of equity
can come in form of regular, special or liquidating dividends
decreases the liquidity ratios, and increase leverage ratios
Stocks dividends
: distributions of new share, rather than cash
Stock splits
: divide each existing share into multiple shares.
Chronology of dividend payment
Declaration date
Ex-dividend date (stock purchased on & after this will not earn dividend)
Holder-of-record date (2 biz days after Ex-dividend date)
Payment date
Share repurchase methods
Buy shares in open market
Buy at a fixed price through a tender offer
Directly negotiate and buy a large block from a large shareholder.
Effects of share repurchase
On EPS
If repurchased is financed with borrowed funds
If firm's E/P = after-tax cost of borrowing, then no effect on EPS
If E/P after-tax cost of borrowing, EPS rises
If E/P < after-tax cost of borrowing, EPS falls
If repurchase is financed with firm's excess cash
On Book value
If share price < original book value per share -> increase book value per share
If share price > original book value per share -> decrease book value per share
Cash dividend & Share-repurchase of same amount
Share repurchase is economically equivalent to cash dividend (of equal amount) considering the effect on shareholder's wealth (if the tax treatment of 2 are similar)