Introduction to Financial Management

iii) Ex-Dividend Date takes effects in four business days prior to holder-of record date.

Stock purchased after this date does not receive the dividend.

iv) The date dividend checks are mailed (mostly electronic now) is called the Payment

Date

Stock Prices at Ex-Dividend Days

i) Stock price drops by approximately the amount of the dividend (85%)

ii) Personal taxes may explain why it does not drop 100% of the dividend

Dividend Reinvestment Plans (DRIPS)

i) Most large firms allow investors to reinvest dividends in new shares

ii) Stock may be old (Treasury stock) or new shares

iii) Dividend is still taxed, but transaction costs are low and discounts are frequently

given

Factors that influence dividend policy
➢ Company growth rate
➢ Restructure covenants
➢ Profitability
➢ Earnings stability
➢ Maintenance of control
➢ Degree of financial leverage
➢ Ability to finance externally
➢ Uncertainty
➢ Age and size
➢ Tax penalties

A stock dividend is the issuance of additional shares of stock to stockholders. A stock

dividend may be declared when the cash position of the firm is inadequate and/or when

the firm wishes to prompt more trading of its stock by reducing it market price. With a

stock divided, retained earnings decrease but common stock and paid in capital on

common stock increase by the same total amount.

A stock dividend, therefore, provide no change in stockholders wealth. Stock

dividends increases the shares hold, but the proportion of the company each stockholder