Condition 2:Divo is 11,000 $1,000 bonds are issued (re=10%) Date 0 Date 1 Aggregate Div to Old stockholders $11,000 $8,900 Payment to the debt 0 1,100 Value per share=11+8.9/(1+10%)=19.09 slide 10
slide 10 Condition 2: Div Condition 2: Div0 is 11,000 & $1,000 is 11,000 & $1,000 bonds are issued ( bonds are issued ( r B=10%) Date 0 Date 1 Aggregate Div to Old stockholders $11,000 $8,900 Payment to the debt 0 1,100 Value per share = 11 + 8.9/(1+10%) =19.09
Manager varying dividend policy Date 0 11 B 10 A 9 C 8.91011.1 Date 1 slide 11
slide 11 Manager varying dividend policy Manager varying dividend policy Date 0 11 B 10 A 9 C 8.9 10 11.1 Date 1
Homemade Dividends ■ The investor prefers dividends per share of $11 at Date 0 and $8.9 at Date 1 under Condition 1. -to borrow $1 or sell off fraction of shares The investor prefers dividends per share of $10 at Date 0 and $10 at Date 1 under Condition 2. -to reinvest $1 and get back $1.10 at Date 1 slide 12
slide 12 Homemade Dividends Homemade Dividends The investor prefers dividends per share of $11 at Date 0 and $8.9 at Date 1 under Condition 1. -- to borrow $1 or sell off fraction of shares The investor prefers dividends per share of $10 at Date 0 and $10 at Date 1 under Condition 2. -- to reinvest $1 and get back $1.10 at Date 1
Dividend policy is irrelevant !! slide 13
slide 13 Dividend policy is Dividend policy is irrelevant !!! irrelevant !!!
Question? "Dividend policy is irrelevant" "Stock price is the present value of expected future dividends" Do you think the above two statements are contradictory? slide 14
slide 14 Question? Question? “Dividend policy is irrelevant” “Stock price is the present value of expected future dividends” Do you think the above two statements are contradictory?