Chapter 17Learning Objectives17.1 Cash Dividends17.1 (A) Buying and Selling Stock17.1 (B) Declaring and Paying a Cash Dividend: A Chronology17.1 (B) Declaring and Paying a Cash Dividend: A Chronology (continued)17.1 (B) Different Types of Dividends17.1 (B) Different Types of Dividends (continued)Slide 917.2 Dividend Policy17.2 (A) Dividend Clienteles17.2 (B) Dividend Policy IrrelevanceSlide 1317.2 (B) Dividend Policy Irrelevance (continued)17.2 (B) Dividend Policy Irrelevance (continued)Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 2317.2 (C) Reasons Favoring a Low- or No-Dividend-Payout Policy17.2 (D) Reasons Favoring a High-Dividend-Payout Policy17.2 (E) Optimal Dividend Policy17.3 Selecting a Dividend Policy17.3 Selecting a Dividend Policy (continued)17.3 Selecting a Dividend Policy (continued)Slide 30Slide 3117.3 (A) Some Further Considerations in the Selection of a Dividend Policy17.4 Stock Dividends, Stock Splits, and Reverse Splits17.4 (A) Reasons for Stock Splits17.4 (A) Reasons for Stock Splits (continued)Slide 3617.4 (B) Reverse Splits17.5 Specialized Dividend Plans17.5 Specialized Dividend Plans17.5 Specialized Dividend Plans (continued)17.5 Specialized Dividend Plans (continued)Slide 42Slide 4317.5 (A) Dividend Reinvestment Plans17.5 (A) Dividend Reinvestment Plans (continued)Additional Problems with AnswersAdditional Problems with Answers Problem 1 (Answer)Additional Problems with Answers Problem 2Additional Problems with Answers Problem 2 (Answer)Additional Problems with Answers Problem 3Additional Problems with Answers Problem 3 (Answer)Additional Problems with Answers Problem 4Additional Problems with Answers Problem 4 (Answer)Additional Problems with Answers Problem 5Additional Problems with Answers Problem 5 (Answer)Table 17.1 Cash Flow at Dividend Payment and Stock Purchase of PepsicoTABLE 17.3 Stock Split Value Changes on a 2-for-1 SplitCopyright © 2010 Pearson Prentice Hall. All rights reserved.Chapter 17Dividends, Dividend Policy, and Stock SplitsCopyright © 2010 Pearson Prentice Hall. All rights reserved.17-2Learning Objectives1. Understand the formal process for paying dividends and differentiate between the most common types.2. Explain individual preferences and issues surrounding different dividend policies.3. Explain how a company selects its dividend policy.4. Understand stock splits and reverse splits and why they are used.5. Understand stock repurchases and dividend reinvestment programs.Copyright © 2010 Pearson Prentice Hall. All rights reserved.17-317.1 Cash Dividends•Many firms pay cash dividends on a regular basis. •The payments of these dividends do correlate with economic times, just like anything else, and in recessionary times firms may cease to pay dividends or cut back on the amount they pay per share.Copyright © 2010 Pearson Prentice Hall. All rights reserved.17-417.1 (A) Buying and Selling Stock•Typically done via –stockbrokers on organized stock exchanges like the NYSE or –through dealers in the over-the-counter market like the NASDAQ.Copyright © 2010 Pearson Prentice Hall. All rights reserved.17-517.1 (B) Declaring and Paying a Cash Dividend: A ChronologyFour key dates include:1. Declaration date:  day on which the board of directors announces that it will be paying a dividend. The amount per share, the last day to record ownership information, and the payment mailing date are typically announced. FIGURE 17.1 PepsiCo dividenddates.Copyright © 2010 Pearson Prentice Hall. All rights reserved.17-62. Ex-dividend date: informally called the ex-date, it is the date that establishes the recipient of the dividend. It is two days before the date of record (discussed next). If you buy before the ex-date, you get any declared dividend; the seller does not. If you buy on or after the ex-date, the seller gets any declared dividend; you do not. 3. The record date determines which shareholders are entitled to receive a dividend. The issuer of the security establishes a list of the owners of record as of this date. 4. Payment date is the actual day on which the declared cash dividend is paid. 17.1 (B) Declaring and Paying a Cash Dividend: A Chronology (continued)Copyright © 2010 Pearson Prentice Hall. All rights reserved.17-717.1 (B) Different Types of Dividends•Various types of dividends declared by companies include: –regular cash dividends –Special or extra cash dividends –stock dividends–liquidating dividendsCopyright © 2010 Pearson Prentice Hall. All rights reserved.17-8•Regular cash dividends are typically paid quarterly and don’t vary much from one quarter to the next of the same year.17.1 (B) Different Types of Dividends (continued)TABLE 17.2 PepsiCo Quarterly Cash Dividend HistoryCopyright © 2010 Pearson Prentice Hall. All rights reserved.17-9Special or extra cash dividends are non-recurring occasional dividends paid by companies after periods of unusually strong performance."Stock dividends are paid in the form of shares of stock instead of cash and are typically stated as a percentage, i.e., a 25% stock dividend would mean that you would get 1 new share for every 4 shares already owned. Liquidating dividends are issued once a firm has ceased its operations and all liabilities and obligations have been cleared.17.1 (B) Different Types of Dividends (continued)Copyright © 2010 Pearson Prentice Hall. All rights reserved.17-1017.2 Dividend Policy •Dividend policy wrestles with the question… Should the firm pay out a large amount now? or Should it invest more in the company? •Some firms pay a lot, while others choose not to pay at all. •Two big questions that researchers have attempted to answer are: (1) “Is there an optimal dividend policy?” (2) “Does dividend policy really matter at all?”Copyright © 2010 Pearson Prentice Hall. All rights reserved.17-1117.2 (A) Dividend ClientelesWhat the different groups of investors with different appetites for dividends are typically called.•Older, retired folks often welcome dividends as a source of income to pay for their expenses, while……•Richer, wealthier investors often dislike dividends because of their tax bite.Copyright © 2010 Pearson Prentice Hall. All rights reserved.17-1217.2 (B) Dividend Policy Irrelevanceis the examination of whether dividend policy has any effect on the overall value of a firm.Dividend policy in a world of no taxes and no transactions costs would be completely irrelevant