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Payout Policy Presented by Vivian Ding

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by

Marigaye Guidry

on 4 November 2013

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Transcript of Payout Policy Presented by Vivian Ding

Payout Policy

Presented by Vivian Ding
& Marigaye Guidry

Side A
invest the entire cash flow generated this year in a new project with a nearly zero yet positive NPV
Side B
Pay out the entire amount as dividends and then raise cash for the project by issuing new shares
2. Value of Stock
& Rate of Return
Value= $37 million assets + ($37 million X 12.6%) cost= $41,662,000

Dividend is zero because of investment of entire cash flow.
FUNDAMENTALS

Definition

Cash Dividend Payment Procedures:
2 ratios
Stock Split

Share Repurchases

Factors Affecting Each:
Raise external captital rather than cut dividends
Repurchasing is more flexible

Payout Policy Irrelevance
Data Analysis
Return on Investment:
Yevaud Enterprises:
$37 million in assets
expects ROA of 12.6%
Stockholders require 12.6% ROI

Yevaud can either:
3.How many shares?
Value/Price= Number of Shares

$4,662,000/$3.70
=
1,260,000 shares
3. Value of Stock
& Rate of Return
Value= $3.7 price per share X(1,260,000 shares needed + 10 million shares outstanding)= $41,662,000

Dividend is .4662 per share ($41,662,000/10 million)
4. Will Choice affect the firm's stock price in One Year?

Yes, but market value does not change.
(amount of shares is different)
5. Percentage of Ownership of Total Stock
$4,662,000/10 mill.=
.4662 X 50,000= $23,310

$23,310/$4.1662 price =
5,595 shares

(50,000-5,595)/10 million =
.44%
5. Percentage of Ownership of Total Stock
50,000 shares/11,260,000=
.44% ownership
QUESTIONS?
Conclusion
Payout policy irrelevance in
a world with perfect capital markets.
Full transcript