CHAPTER 6
DIVIDENDS AND SHARE REPURCHASES: BASICS
LEARNING OUTCOMES
After completing this chapter, you will be able to do the following:
- Describe regular cash dividends, extra dividends, stock dividends, stock splits, and reverse stock splits, including their expected effect on a shareholder’s wealth and a company’s financial ratios.
- Describe dividend payment chronology, including the significance of declaration, holder-of-record, ex-dividend, and payment dates.
- Compare share repurchase methods.
- Calculate and compare the effects of a share repurchase on earnings per share when (1) the repurchase is financed with the company’s excess cash and (2) the company uses funded debt to finance the repurchase.
- Calculate the effect of a share repurchase on book value per share.
- Explain why a cash dividend and a share repurchase of the same amount are equivalent in terms of the effect on shareholders’ wealth, all else being equal.
SUMMARY OVERVIEW
- Dividends can take the form of regular or irregular cash payments, stock dividends, or stock splits. Only cash dividends are payments to shareholders. Stock dividends and splits merely carve equity into smaller pieces and do not create wealth for shareholders. Reverse stock splits usually occur after a stock has dropped to a very low price and do not affect shareholder wealth—they represent cosmetic repackaging of shareholder equity.
- Regular cash dividends—unlike irregular cash dividends, stock splits, and stock dividends—represent a commitment ...
