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dends tend to be followed by (immediate) increases in share prices, how can it be said that dividend policy is irrelevant?

dends tend to be followed by (immediate) increases in share prices, how can it be said that dividend policy is irrelevant?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Dividend Policy.  How is it possible that dividends are so important, but at the same time, dividend policy is irrelevant?  If increases in dividends tend to be followed by (immediate) increases in share prices, how can it be said that dividend policy is irrelevant?

Consider a firm whose net income for the current year is $195 million, their target equity ratio is 75%, and the expected capital budget is $135 million. What are its distributions to be made to shareholders, according to the residual model? The firm has 80 million shares. Assume for now that the distribution is in the form of a dividend. What is the forecasted dividend payout ratio? What is the forecasted dividend per share. Net Income Target equity ratio Total capital budget Total Dividends $ Payout Ratio What if the expected capital budget rose to $155 million? Total capital budget Total Dividends $ Payout Ratio = Suppose the firm has decided to distribute the amount you first calculated above, which it presently is holding in very liquid short-term investments. The firm's value of operations is estimated to be about $1,525 million. The firm has $381.25 million in debt (it has no preferred stock). As mentioned previously the firm has 80 million shares of stock outstanding. Assume the firm has not yet made the distribution. What is the firm's intrinsic value of equity? What is its intrinsic per share stock price? Inputs Value of operations Short-term investments Debt Number of shares Value of operations + Value of nonoperating assets Total intrinsic value of firm - Debt Intrinsic value of equity ÷ Number of shares Intrinsic price per share Prior to Distrib ution
Transcribed Image Text:Consider a firm whose net income for the current year is $195 million, their target equity ratio is 75%, and the expected capital budget is $135 million. What are its distributions to be made to shareholders, according to the residual model? The firm has 80 million shares. Assume for now that the distribution is in the form of a dividend. What is the forecasted dividend payout ratio? What is the forecasted dividend per share. Net Income Target equity ratio Total capital budget Total Dividends $ Payout Ratio What if the expected capital budget rose to $155 million? Total capital budget Total Dividends $ Payout Ratio = Suppose the firm has decided to distribute the amount you first calculated above, which it presently is holding in very liquid short-term investments. The firm's value of operations is estimated to be about $1,525 million. The firm has $381.25 million in debt (it has no preferred stock). As mentioned previously the firm has 80 million shares of stock outstanding. Assume the firm has not yet made the distribution. What is the firm's intrinsic value of equity? What is its intrinsic per share stock price? Inputs Value of operations Short-term investments Debt Number of shares Value of operations + Value of nonoperating assets Total intrinsic value of firm - Debt Intrinsic value of equity ÷ Number of shares Intrinsic price per share Prior to Distrib ution
Now suppose the firm has just made the distribution in the form of dividends. What is the firm's intrinsic value of equity? What is its intrinsic per share stock price? Value of operations + Value of nonoperating assets Total intrinsic value of firm - Debt Intrinsic value of equity ÷ Number of shares Intrinsic price per share Dividend per share Prior to Distribution Value of operations + Value of nonoperating assets Total intrinsic value of firm - Debt Intrinsic value of equity + Number of shares Intrinsic price per share Number of shares repurchased Suppose instead that the firm has just made the distribution in the form of a stock repurchase. Now what is the firm's intrinsic value of equity? How many shares did the firm repurchase? How many shares remained outstanding after the repurchase? What is its intrinsic per share stock price after the repurchase? If Distributed as Dividend Prior to Distribution If Distributed as Repurchase
Transcribed Image Text:Now suppose the firm has just made the distribution in the form of dividends. What is the firm's intrinsic value of equity? What is its intrinsic per share stock price? Value of operations + Value of nonoperating assets Total intrinsic value of firm - Debt Intrinsic value of equity ÷ Number of shares Intrinsic price per share Dividend per share Prior to Distribution Value of operations + Value of nonoperating assets Total intrinsic value of firm - Debt Intrinsic value of equity + Number of shares Intrinsic price per share Number of shares repurchased Suppose instead that the firm has just made the distribution in the form of a stock repurchase. Now what is the firm's intrinsic value of equity? How many shares did the firm repurchase? How many shares remained outstanding after the repurchase? What is its intrinsic per share stock price after the repurchase? If Distributed as Dividend Prior to Distribution If Distributed as Repurchase
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