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TUTORIAL 11. DIVIDEND PAYOUT POLICY
Truste
Recall Lecture Note d
1. Rationale of Dividend Payout Policy
Financial managers’ decision:
- Capital structure: whether you should use debt or equity to finance your business?
+ Debt - bonds vs. Equity - the shares
+ Bond & Shares valuation
- Capital budgeting: how would we make the investment decision?
+ NPV rule, IRR, payback.
- Dividend policy/Payout policy
1st, financial managers need to think about where should they get the money (financing
decision)
 they can raise the money from 2 main sources of financing:
+ they can get the money from equity by selling the shares of the business.
+ they can borrow the money by issuing debt right so after they get the money.
2nd, after they get the money they will need to use this amount of money to do investment
 they will make investment decision to generate more money for the business, based on
the capital budgeting rules.
+ Key role in budgeting is NPV right so the second stage after you raise the money is to
invest your money OK so you use your money to invest
3rd, after you invest you will expect to get some returns (some profits) => you will need to decide
what should you do with this profit.
+ What happens to the share value?
+ What is the signal of your decision to the market?
so after you use the assets you invest in using the money of the investors OK now it is time for
you to think about how would you use the profit right so basically as a finance manager you can
have two directions to use the profit you can pay it out or you can retain it OK so what does it
mean by retaining retaining it means you will keep the money with your business instead of
giving it back to the shareholder OK now it is time for you to keep it for your money OK now let's
think about the situation here in the payout decision the only the the only investor who will be
involved will be the shareholder OK we don't really care about the debt holders in these
situations why the key thing is that when you borrow the money do you have to pay back the
debt do you have an option that you can pay the debt back or not do you do you think that you
will have an option to pay back the debt can you choose what you want to pay it back or you
have to pay it back what do you think when you borrow the money you have to pay that right
you must pay it because this is the obligation to paid it it is a legal contract between you and the
lenders so when you borrow the money there is no option for you right you can choose to pay
out the dividend to the shareholder but if you want to pay the money to the debt what does
that is your application OK you have no option you have no choice alright so in this case when
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we talk about the payout policy we just think about the shareholder we the you should use the
Truste
money that you gain from the investment in order to pay it out to the shareholder or not OK
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regardless of what who do you earn a profit or you don't earn a profit you still need to pay the
debt holders so in this case we ignore the debt holder because it's something that we have to do
already it is not that important to consider at this stage but what we are really care about is the
when you have some profit should we give it back to the shareholder ohh I should we keep it
with our company that is the meaning of the payout policy or the dividend policy is that clear
everyone can you see the key thing that the DM policy or the payout policy will be related to OK
so just don't think about the debt holders in this context because regardless of what you are
doing you even more profitable or you are not profitable you still have to pay back the debt you
have no option but to pay out the money to the shareholder you can make your decision and
that is half what you have to think about as a finance manager of the company and that is why it
is involved in this topic for corporate finance
2. How to use business profit?
OK right now so you can see this chart right so I draw this diagram just to tell you what's
happened now the payout policy will involve distributing the profit OK so you have two options
you can pay it out to the shareholder or you can retain it retain it it means keeping the money
with your company you don't give it back to the shareholder alright so when you keep the
money with your business you can have two things you can do with it you can put it into cash
right you can keep it as cash it's just like when you have some saving you put it into your pocket
and save it in your deposit at the bank that is the cash so you put the retained earnings as cash
into your business another way for you to use the retained earnings is to do reinvestment OK so
now if you think about the situation here most of the company they will retain the earnings to
do the reinvestment why because the company will always need to grow and they cannot grow
without investment OK without investment OK you can think like you have a small coffee shop
and if you are profitable this year you want to expand your business right you don't want to stop
there you want to expand your business and to grow further and if you want to grow you would
have to do reinvestment and where could you get the money to do reinvestment it might be
coming from your retained earnings OK so in this case if you retain the money you decide to
retain the money you can have two ways that you can use the money for first you can put it into
the cash deposits at the bank and save it for your business the second one you can do
reinvestment right of course now let's think about the situation OK let me ask you a quick
question to see whether you can critically thinking about this one now let's say if we were in the
pandemic let's say COVID-19 pandemic right so if we worry the pandemic do you think when
you retain earnings would you do the reinvestment or would you save the retained earning as
cash what do you think what might be your decision if we weren't in the pandemic which means
the market is very uncertain OK would you use the retained earning state a cash or you would
do the reinvestment at that time what would be your decision anyone here you save it OK hmm
anyone else might have a different idea what do you think no so save it is a good choice right it's
pretty safe OK now let's think about what do you have to face S finance manager when you want
to decide whether you should save the retained earning as cash or you want what you want to
do the reinvestment depending on the market situation right so if we were all in the downturn
and all the things prices actually drop significantly OK so it is a good opportunity for you to save
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the money and to invest later right so if we were in the pandemic we know that in the future OK
Truste
the market will be in the downturn especially because the government will have to spend a lot
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of money to deal with the pandemic OK so of course there will be some stage in the future after
the pandemic we would be in a significant downturn and that is the stage where the asset prices
will drop significantly and that will be the stage where you can make your investment very
profitably OK so if you were a finance manager OK and if you were in that situation and during
the pandemic it's better to save the cash and you wait for the market if the market is in the
downturn you take that chance and pull out your money use it to do the reinvestment OK so
that is the timing of the market and as the finance manager you have to think about what will be
the good opportunity for you to invest OK saving the cash here first that can help you to avoid
uncertainty in the market at the time of the pandemic second it will help you to give an
opportunity for future investment when the market prices of the assets dropped significantly
after the pandemic that is what you can observe now right OK so during the pandemic of the
COVID-19 many companies saved their cash they didn't want to do the reinvestment at the time
it is not because that they are afraid of something but they just want to see how the market will
go and they expect that there will be a downturn which will be a better way for them to do
reinvestment is less costly OK so that is the decision between hash and reinvestment OK so you
have to consider whether how would you want to use your money when you retain the profits
OK so now the next thing payout OK if you choose to pay out the money you can choose to pay
out by two ways first you can pay a dividend OK another way you can do share repurchase OK so
you have two ways in order to pay out the money alright so this is actually good for the
shareholder you are distributing the wealth back to the shareholder OK but they work in a very
different way the effects on the market and the effects on the reaction of the investors to these
two types of payout it's very different OK now let's talk about the dividend first
OK let's get back to the lecture slide so you can see a diagram like that in the lecture slide as well
ohh oops I'm sharing the wrong window just wait a moment OK now are we clear about how it
work when we have some profits or free cash flows everyone OK so this is the charge that you
can refer to 1st we have the free cash flow or some free profits after you distribute it to the debt
holders and after you sustained all the things that required for the business next you can choose
whether you want to retain the money or you want to pay it out OK retain the monies can be in
two ways you can invest in the new projects or new investment or you can increase the cash
reserves OK pay out there are two mainers that a company can pay out the money to the
shareholder we can have cherry purchases or we can have a dividends OK all right now if you
think about this situation right so you know that based on what we learned from the share
valuation alright the formula that we usually use to value a share is that the price will be equal
to the dividend divided by r - g OK so I think that you are familiar with this formula right this is
the constant growth model OK alright now if you look at this model you would think like the
dividend is the core for your valuation right now if you increase the dividend what will happen to
the share price let's say now you keep everything constant and if you increase the dividend the
T1 what will happen to the share price can anyone let me know based on the formula here what
do you think keeping other things constant right if you increase the dividend what will happen to
the share price it will increase or decrease or decrease good it will increase as well right so it's
the finance manager if you pay out more dividend then the share price will increase if that is the
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case right so why would a company would have to think about whether they should pay the
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dividend or they should invest the money back to the company right if that is the case then why
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do we need to think about pay up policy right so in this case there might be something that you
have to think a little bit deeper there is another layer that you might have missed OK so now
let's look at the formula beside the D1 now there are two things that will be decide your that
will decide your price of the share right those two things including the R and the the growth rate
right and in fact D&G they are related now let's think about the company that pay out a lot of
dividend then do you think that they have sufficient money to do the reinvestment yes or no if
they pay a lot of money for dividend OK then what will happen to the amount of money that will
be available for them to make reinvestment in the future it will be less right and with our
investment would you have growth rate yes or no if you don't do investment you're growth rate
will be high or low what do you think there is no growth actually right if you don't have the
money to do the reinvestment how can you crawl OK a business cannot stay there forever and of
course they will have to do the reinvestment in order to crow right so in this case the D and the
G they are interrelated to each other and more correctly they are inverse related to each other
OK there is an inverse relationship between these two things when you pay out more dividend
you are actually minimizing the cheap OK you are minimizing the cheap and vice versa when you
pay less dividend you are actually maximizing the cheap OK so when you pay less dividend you
retain your money you do the reinvestment you can grow better OK so that is the relationship
between D&G OK and to an extent when you pay a dividend you can actually see the lower G
and that will keep your price not increasing as you expected OK so in this case you would have to
think about the relationship between D&G you save the money or you pay it out that will affect
the growth rate of your company in the future for sure OK all right now if you look at this
example I think that this example is pretty useful especially if you look at a numerical example
you can understand the problem better OK now let's read the question together friends sporting
goods expects to have an earnings per share of $6 in the coming year and rather than reinvest
these earnings and grow the company plans to pay our all of his earnings as dividend with the
expectation of no growth bring current share price is $60.00 OK suppose crane would cut its
dividend payout rate to 75% only for the foreseeable future and use the retained earnings to
open the new stores and the return on the investment in these stores it's expected to be 12% so
if we assume that the risk of these new investment is the same as the risk of this existing
investment then the firm's equity cost of capital is unchanged and what effect would this new
policy have on crane share price OK now let's think about the first situation OK in the first
situation no reinvestment was made the retained earnings OK so the the earnings were
completely paid out OK now there is no reinvestment and the share price stayed at $60.00 per
share OK now this company changed the policy they say that they don't pay out 100% of the
earnings anymore but they will save 25% for the future reinvestment and they pay out only 75%
OK all right so if you think about this situation you will see that in the case of doing the
reinvestment you have to think about how much return that reinvestment can give you whether
it is sufficient to compensate for the cost that you raise the equity OK now if you look at this one
OK based on the share price of the current $60.00 you can calculate the cost of equity right
using this formula OK so let's say in the first scenario there is no growth so that she will be zero
OK the G will be 0 so basically your formula will be ES equal to D 1 / r so you can simplify the
equation and calculate the G as equal to 10% right and after that you can see if you do the
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reinvestment the return on the investment OK will be 12% is that higher or lower than your cost
Truste
of equity the RE can you tell me the expected return on the investment is 12% is that higher or
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lower than the cost of equity that you just found it is higher right OK so if you can do an
investment that is actually viewed a return that is higher than what it cost you to raise the
money for OK would you do that investment or not yes or no if you can do an investment that
you would a higher return compared to what it costs you to raise the money at the beginning
would you do that investment what is your answer yes or no yes of course it is a profitable
investment right basically because you pay only 10% but you can earn 12% you can earn 2% of
the return and an extra right so in this case it is obvious that undertaking the reinvestment is a
good decision and if you recall latest share price you can see the share price increase to 64.29%
OK so for the recalculation of the share price please have a look at a lecture slide for yourself OK
but just think about the situation it's very simple to understand OK so if you can earn something
that is more than it costs you OK then of course you should pursue this investment it is a
profitable choice of investment and it will definitely increase your share price OK so when you
do the reinvestment OK you will get 12% and the amount of money that you saved is 25% so
that she or the growth rate is called can be calculated based on the multiplication of your
retention ratio and the return on the investment OK so this is 0.25 which means 25% so you pay
out 75% you are left 25% to be kept at a company that is retention ratio OK so you take the
retention ratio you times the return on investment you will find expected growth rate for your
reinvestment OK so you plug it in here and the tablet and now is no longer sub 100% but it will
be 75% OK only of $6 alright so that is 4.5% you plug it in you would see that even if you pay less
dividend but with the reinvestment promise OK so you can see that the investment is very
promising and because of that investment you will get a growth rate of 3% even that you pay
less dividend out you still can have a higher share price OK so the higher share price here
reflecting the fact that you are invest in a project that you the higher return compared to the
cost of capital at the beginning OK is that clear about this example everyone can you understand
why the share price increase and how to do the recalculation for the share price it's all clear do
you have any questions all right now if you go to the next example it will be a little bit different
now let's think about another situation now suppose that the return on the new investment of
this company is only 8% then as the shareholder or as a finance manager do you think that you
are happy with this reinvestment decision if the reinvestment only you you 8% of return instead
of 12% would you take up this opportunity to do reinvestment yes or no what do you think what
is your decision no right because what you gain is less than what it cost you OK so in this case
undertaking the reinvestment using the retained earning is not a wise choice because it will
make your share price drop and if you redo the calculation you can see that is what is going on
OK so you retain 25% now the return on investment is only 8% so the growth rate is 2% and if
you plug that 2% into the formula to calculate the share price you will see the share price
dropped to only 56 point $25.00 so the drop in the share price reflecting the fact that even
though that you retain the earnings but you don't use the earning to generate more than what
you're supposed to pay OK so in this case doing reinvestment is not a good option for you to
pursue OK so that is how you can make a decision regarding whether the investment is worth
the retention of the money or not OK so in the future if you work at finance manager and
suddenly you come to the shareholder you say that hey this year I don't pay you the dividends
but I want to save the money for my investment and it you could 21 to convince the shareholder
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that why you are saving the money with the company you will need to show them the promise
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of your return OK with the the return will be higher than what they required OK so for example
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as a finance manager to say I will not pay you the dividend this year but I will use the money to
do the reinvestment and this reinvestment is expected to yield 15% of return per year OK and
let's say as a shareholder you expect only 8% of return then you are happy with the company
decision to keep the money there right because they can generate a return that is higher than
what you expected or what you require the company to pay you then you feel safe you are OK
for the company to keep it right so be aware that when you make an announcement related to
your payout dividend policy is really sensitive it can send a signal to the market whether your
company is doing well or badly OK alright are we all good with that part everyone can you
understand how it worked OK so when you do reinvestment just make sure that the
reinvestment can give you the growth rate that is sufficient of step the decrease in the dividend
because when you choose to retain the money you have to cut the dividend and you need to
make sure that the growth rate you can obtain from the reinvestment is sufficient to offset the
decrease in the dividend to keep the share price at a reasonable level OK alright now that is for
the retain and reinvestment together with the payout policy OK whether you should pay it out
or you should retain it that is the first stage
OK now let's say now you decided to pay out you can choose whether you want to pay out by
dividend or you want to do share repurchase OK now what does it mean by share repurchase
another term that we usually use for the share repurchase is shares by back OK you will hear
you will hear this term many times especially when you read the industrial report or you read
academic report it will also give you the share repurchases or share buybacks OK now that's the
name what can you think about the number of shares outstanding when the company
repurchased the shares what do you think what will happen to the number of shares
outstanding when the company buy back the shares of itself what will happen to the number of
shares outstanding what do you think what does it mean by by by or what does it mean by
repurchase very good there will be fewer shares in the market right alright so let's say you have
100 shares outstanding the market now you buy it back right so basically you are telling the
market that the number of shares outstanding the market will be fewer compared to what we
test in the past OK so when you do a share repurchase it will lead to a decrease in the number of
shares outstanding and it will actually make the price higher OK yes you are correct V so the
price will increase since the supply is low that is good OK so sometimes the price will not adjust
immediately OK but it will adjust gradually so you will see the share price increase after the
share repurchase because the number of shares outstanding the market decrease and the
market will adjust based on the real value of each share right so the consolidation in the
opposite to dilution yes very good so the correct term to use consolidation so we usually say
that you will have a decreased number of shares outstanding when you do the share repurchase
OK you can use the word consolidation as well OK alright so you know all right that when we do
the share repurchase the number of shares outstanding will fall and the value per share will
increase that may make the share price to increase OK all right how about when you pay out the
dividend what will happen OK so this will illustrate for you what will happen when you pay the
dividend or when you steal the repurchase OK now let's say you have a company with a balance
sheet look like this OK consider a firm that wishes to distribute $100,000 to its shareholder now
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if you look at this is a simple balance sheet of this company we have debt we have equity and
Truste
we have value of this firm right the number of shares outstanding is 100,000 shares OK price per
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share we currently have the market value for equity is 100 is a 1,000,000 and we have 100,000
shares outstanding so each share is worth $10 OK the price per share is $10 OK now what would
happen to the share price when you paid the dividend OK so if you pay out the cash dividend to
the shareholder you would see The thing is that if you pay out the cash the cash will fall right if
you still remember what you did in accounting you always need to keep two side of the balance
sheet equal right let's say you pay out cash 100,000 so your cash will drop by 100,000 here and
you see so originally you have $150,000 in cash now it's dropped to only 50,000 can you see it
OK because you use this amount of money to pay out as dividend so that is the reason why
$100,000 disappear from the balance sheet OK it is basically because you use the cash to pay
the money OK so you pay $100,000 out to the dividend for the shareholder OK and to keep the
balance sheet balance you would have to reduce the equity by 100,000 as well OK so in this case
when you pay the cash dividend the cash reserve decrease and the equity value also need to
decrease to balance out the decrease in asset and in the end the number of shares outstanding
does not change so the dollars share does price per share would drop OK the price per share
would drop can you see how it work everyone and you see that everyone OK is it good enough
OK alright So what you can see here from this slide is that when you make a decision that you
will pay the shares dividend or the cash dividends the share price will be dropped when you
decide to do that because you are actually seeing the cash flow out of the company now let me
ask you a question as the shareholder do you think this is a bad thing for you are you worse off
when the company paid the dividend out the share price drop right are you where yourself what
happened to your wealth think about it when the company pay out the money the share price
drop the key question is as the shareholder are you worse off yes or no what do you think if you
are the shareholder do you think that when the share price dropped because of the cash
dividend are you happy or are you happy with it anyone give me a suggestions what do you
think no one umm now let's think even though the share price moved 12 who will receive the
dividend who will get the dividend even though that the share price drop but the company
payout A dividend who will get the dividend the shareholder right so as the shareholder you
receive the cash dividend and the share price drop at the same time these two things off- setting
each other right so your wealth will be maintained do you agree OK so in the thing in the case
when the company pay out the cash dividend you can see the share price surprise to 12 but it
doesn't mean that you are worse off right you are receiving the dividend to compensate for the
loss in the share price or the share valuation OK it's just like the company will change the way or
the wealth that you are contributing to the company OK so instead of letting the company to
keep your money entirely now the company pays out to you and give it back to you OK so you
are not worse off your wealth is still the same with what you have at the beginning but the
distribution of the wealth is different now you are no longer keeping your wealth more with the
company but the company didn't talk to you OK do you see how it worked so just don't think
that paying the dividend is bad because the share price will 12 yes of course the share price drop
but you will get the dividend for compensation of the share price drop a cream did you get it
everyone so your wealth is completely maintained OK so don't panic when you do the
investment in the future and when you see a dividend announcement you know that the share
price will drop for sure and some investor will say ohh this is so bad the share price drop but it is
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not bad because you have to wait to receive the dividend OK then you are not worse off you are
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just changed the way that you put your money right now instead of putting the money into the
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company you're putting the money into your pocket right so that is how the dividend policy for
the cash policy word OK alright so when the company pay out the cash dividend the share price
will 12 but the shareholder wealth will be maintained no problem with the shareholder OK no
how about what would happen when you do a share repurchase OK so when you do a share
repurchase one thing that you can notice is that the number of share outstanding will change or
will be reduced OK but the share price there's an increase at all right so there is a conflicting
thing subscript we can see here the price will not increase even though the value per share of
the company will increase but the price won't increase OK so get back to the V2V point
previously you said that the price will increase since the supply will be low you can see from this
lecture slide the price does not necessarily increase OK so it's only increased when you can
repurchase the shares at a lower price than the current market price OK but that is out of scope
for this course we don't discuss that mechanism here so the share price can increase or stay the
same it depending on the repurchase price OK but we don't cover it here because it's a little bit
complicated to understand it is for advanced corporate finance OK so the share price of the
company can increase or stay the same depending on what is the price you pay to repurchase
the shares OK all right so that is how we can see it works here but in this slide we take it very
simple there is no change in the share price it's basically because that the number of shares
outstanding drop OK and the value of equity change because of the number of shares
outstanding is lower it is not because of the share value is lower OK are we good everyone are
you still with me up to the stage how about the others are you alright thank you fat did you
catch my point OK so just don't miss understand that the share price will increase the share
price can stay the same or increase depending on how much you have to pay to repurchase the
shares OK if you're interested about it talk to me I can explain to you how it works but you just
think that it can increase or it can stay the same OK in this case it stay the same alright because
you repurchase the shares at the same price of the market right now let's say you pay 100,000
to repurchase the share right and the number of shares outstanding 4 by 90,000 alright so so 4
to 90,000 so can you guess what is the repurchase price can you guess what is the repurchase
price now let me do a quick calculation for you alright all right now you have $100,000 to
distribute to the shareholder right isn't it OK so you repurchase the shares OK and the number
of shares outstanding after you repurchase is 90,000 OK 90,000 shares originally you have
100,000 shares right so can you tell how many shares you have repurchased anyone how many
shares that you have repurchased at the beginning you have 100,000 now it is left with only
90,000 then how many shares you repurchased or how many shares you bought back very good
10,000 shares right 10,000 shares alright now 10,000 shares you have $100,000 you bought back
10,000 shares can you know what is the repurchase price how much did you pay per share to
buy it back how much do you pay for each share to buy it back and you calculate it right so you
have $100,000 to spend to repurchase 10,000 shares then it is actually cost you $10 per share all
right so it means you are buying back at the market price at the fair price in the market that is
the reason why the share price don't change right because everything happening at the market
price at the fair price OK so everyone is happy nothing happened at all that is the reason why
the share price unchanged do you see it the OK so this is the mechanism basically it depending
on your repurchase price OK whether you can repurchase at the market share price or not if you
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can the share price won't change but if you repurchase at the price that is lower or higher than
Truste
the market price then the share price will adjust accordingly OK are we good everyone ohh clear
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here Yep alright so that is how we can think about the share price change when we have the
share repurchase OK alright now let's think about the next slide so another important point for
this lecture is what we refer as the concept of homemade dividends so homemade dividend is a
concept when we talk about the perfect capital market so you can think like perfect capital
market is where there is no taxes no transaction nothing that can intervene you or stop you from
doing the trading independence market that is a perfect capital market so for example if you
want to sell our shares you can sell it immediately without any cost if you earn something from
the share you won't be taxed OK it's completely tax free market OK so how many dividend is
only applicable in the case of perfect capital market OK so this thing is unreal in reality but of
course it is a good starting point for you to understand what is the meaning of the dividend
policy OK so if you look at this example OK so it is simple example that's telling you that you can
earn or you can actually create the dividend policy by yourself you don't have to wait for the
company to decide whether they should pay it out or not OK so this is an example so for
example there is the BNG incorporated and the current share price is $42.00 per share and this
company is about to pay $2.00 of cash dividend per share OK now you are owning 6 you are
owning 80 shares of this company and prefer $3 dividend instead of $2.00 OK so you can
actually do it by yourself you want to cash out then you can do it by yourself you don't have to
wait for the company to decide whether they want to pay out or not you can do it by yourself
and you can do it by selling 2 shares of yours OK now let's see what's happened now if the
company paid $2.00 per share for the cash dividend you can see that the cash dividend that you
will receive in total is 160 agreed OK so this 160 is 80 shares you are owning times $2.00 per
share that is 160 OK and cash from selling stock there is no selling here you keep it here zero so
the total cash you will get is 160 but at the same time the value of the stock will fall because at
the current price it is $42.00 if the company payout the cash dividend of $2.00 per share the
share price will drop to 40 OK you can see how it's happening right cash dividend will reduce the
share price exactly by the dividend per share OK so originally the cash the share price is $42.00
you pay out $2.00 so the share price left with only $40 per share you times 80 you will get 300
$3200 OK So what is your total wealth here your total wealth including $160 in cash plus $3200
in stocks OK of BNG alright so the total value of your wealth is 3360 OK so including this 3200
and 160 in cash OK that is your total wealth at the time when the company pay you the dividend
now the question saying that you don't like that one but you want to have $3 per share as the
dividend so you can create it by yourself OK how can you create it first let's think about a
scenario if you would like to have $3 of dividend per share the cash you will receive is no longer
160 but it is 240 right 80 * 3 it is 240 OK and the value of the stock you will be holding will be
not $39 * 80 it is actually worth 3120 so the total wealth remained the same right you can see
the total wealth it's still 303,360 OK but just different distribution now you have 240 in cash plus
one thousand 3120 in shares OK that is what you would like to see OK so you want to create that
dividend by yourself you don't need to weigh the company to pay you more you can do it by
yourself that is why we say it is homemade OK how you can do it now the amount of dividend
you want to cash out is 240 but the company only paid you 160 then how much is missing
everyone so you want 240 in cash but the company pay you only 160 then how much is missing
to meet your target how much is missing very good we are missing 80 right so how can you get
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these 80 so you know that when the company payout the dividend of $2.00 the share price will
Truste
drop to $40 per share right so if you want to cash out $80.00 more then you just need to sell 2
d
shares in the market when the company paid the dividend of $2.00 out right so the share price
at that time is $40 per share so 80 / 40 it will be equal to two so that is the reason why in the
lecture slide it is telling you that if you want to obtain the $3 per share you just need to sell 2
shares to cover the $80.00 that it's missing OK are we OK and you must stand why the lecture
supplies adjusted something like that OK so the missing is $80.00 and now you just need to sell 2
shares at $40 after the company paid the dividend of $2.00 per share then you will get that $80
OK ohh good OK can you understand how this example work so basically this example to
illustrate to you is that the dividend policy doesn't matter if you are in a perfect capital market
OK perfect capital market it means there is no taxes there is no transaction cost it's easier for
you to sell you can do anything that you want the market is free the market is nothing
problematic OK but nothing like that exists in reality so how many dividend doesn't exist in
reality but it's just the base case for you to understand everything OK alright so for the tax policy
in Australia we have imputation system so this one is pretty interesting but I don't think that we
will have time to cover this one in the course so in in your assignment I don't think it is relevant
so we can skip it but if you're interested in the imputation system you can read more about it by
Google search it OK so I think on Google there are plenty of information about imputation
system so imputation tax system is actually related to Australian and New Zealand market we
are using it here in New Zealand as well OK all right now the rest of the lecture notes you can
have a look by yourself especially this part is important for your assignment about the signaling
thing so the manager will have to consider whether they should cut or they should increase the
dividend it depending on how the market will react to it so you will need to read
comprehensively these slides in order to understand without the the manager will decide to cut
or to increase the dividend what might be the cost or what might be the benefits of doing so OK
so I just want to go through some key points for this lecture and I'm thinking that is pretty
enough for today is that all good everyone is it all clear how about the others are you alright all
right thank you so if that is the case feel free to leave the sessions so we finish the session today
thank you so much for your participation everyone and I will see you back next week the last
week of the semester thank you so much and have a nice day I will stop recording now.