FINANCIAL MANAGEMENT PART 14

1. Dividends Chapter 14

6. The Dividend Controversy—Irrelevance—Example Example Q: The Winters are retirees with most of their savings invested in 10,000 shares of Ajax Corporation (AJAX). AJAX sells for $10 per share and pays an annual dividend of $0.50 per share. This year AJAX eliminated the dividend but began to grow at 5% a year due to the reinvested earnings. How can the Winters maintain their income and their position in AJAX? A: Their original value of AJAX shares was $10 per share  10,000 shares, or $100,000, which they wish to maintain. But, they were generating an annual dividend of 10,000 shares  $0.50 or $5,000 before AJAX eliminated the dividend. After one year of 5% growth, AJAX’s shares should be selling for $10.50. Thus, by selling 476 shares ($5,000  $10.50) they can generate $5,000 in cash. Their remaining 9,524 shares would be worth $10.50 each for a total of $100,002.

18. Figure 14.1: The Dividend Declaration and Payment Process

21. Stock Splits and Dividends A firm with 100,000 shares outstanding executes a 2-for-1 split. Each stockholder will now have twice as many shares as they had before. The firm will now have 200,000 shares outstanding. Each share is worth half as much as before the split. Example