Dividend Policy. How is it possible that dividends are so important, but at the same time, dividend policy is irrelevant? If increases in dividends tend to be followed by (immediate) increases in share prices, how can it be said that dividend policy is irrelevant? Consider a firm whose net income for the current year is $195 million, their target equity ratio is 75%, and theexpected capital budget is $135 million. What are its distributions to be made to shareholders, according to theresidual model? The firm has 80 million shares. Assume for now that the distribution is in the form of a dividend.What is the forecasted dividend payout ratio? What is the forecasted dividend per share.Net IncomeTarget equity ratioTotal capital budgetTotal Dividends $Payout RatioWhat if the expected capital budget rose to $155 million?Total capital budgetTotal Dividends $Payout Ratio=Suppose the firm has decided to distribute the amount you first calculated above, which it presently is holding invery liquid short-term investments. The firm's value of operations is estimated to be about $1,525 million. The firmhas $381.25 million in debt (it has no preferred stock). As mentioned previously the firm has 80 million shares ofstock outstanding.Assume the firm has not yet made the distribution. What is the firm's intrinsic value of equity? What is its intrinsic per sharestock price?InputsValue of operationsShort-term investmentsDebtNumber of sharesValue of operations+ Value of nonoperating assetsTotal intrinsic value of firm- DebtIntrinsic value of equity÷ Number of sharesIntrinsic price per sharePrior toDistribution Now suppose the firm has just made the distribution in the form of dividends. What is the firm's intrinsic value of equity?What is its intrinsic per share stock price?Value of operations+ Value of nonoperating assetsTotal intrinsic value of firm- DebtIntrinsic value of equity÷ Number of sharesIntrinsic price per shareDividend per sharePrior toDistributionValue of operations+ Value of nonoperating assetsTotal intrinsic value of firm- DebtIntrinsic value of equity+ Number of sharesIntrinsic price per shareNumber of shares repurchasedSuppose instead that the firm has just made the distribution in the form of a stock repurchase. Now what is the firm's intrinsicvalue of equity? How many shares did the firm repurchase? How many shares remained outstanding after the repurchase?What is its intrinsic per share stock price after the repurchase?If Distributedas DividendPrior toDistributionIf Distributedas Repurchase

Question

Dividend Policy.  How is it possible that dividends are so important, but at the same time, dividend policy is irrelevant?  If increases in dividends tend to be followed by (immediate) increases in share prices, how can it be said that dividend policy is irrelevant? Consider a firm whose net income for the current year is $195 million, their target equity ratio is 75%, and theexpected capital budget is $135 million. What are its distributions to be made to shareholders, according to theresidual model? The firm has 80 million shares. Assume for now that the distribution is in the form of a dividend.What is the forecasted dividend payout ratio? What is the forecasted dividend per share.Net IncomeTarget equity ratioTotal capital budgetTotal Dividends $Payout RatioWhat if the expected capital budget rose to $155 million?Total capital budgetTotal Dividends $Payout Ratio=Suppose the firm has decided to distribute the amount you first calculated above, which it presently is holding invery liquid short-term investments. The firm's value of operations is estimated to be about $1,525 million. The firmhas $381.25 million in debt (it has no preferred stock). As mentioned previously the firm has 80 million shares ofstock outstanding.Assume the firm has not yet made the distribution. What is the firm's intrinsic value of equity? What is its intrinsic per sharestock price?InputsValue of operationsShort-term investmentsDebtNumber of sharesValue of operations+ Value of nonoperating assetsTotal intrinsic value of firm- DebtIntrinsic value of equity÷ Number of sharesIntrinsic price per sharePrior toDistribution Now suppose the firm has just made the distribution in the form of dividends. What is the firm's intrinsic value of equity?What is its intrinsic per share stock price?Value of operations+ Value of nonoperating assetsTotal intrinsic value of firm- DebtIntrinsic value of equity÷ Number of sharesIntrinsic price per shareDividend per sharePrior toDistributionValue of operations+ Value of nonoperating assetsTotal intrinsic value of firm- DebtIntrinsic value of equity+ Number of sharesIntrinsic price per shareNumber of shares repurchasedSuppose instead that the firm has just made the distribution in the form of a stock repurchase. Now what is the firm's intrinsicvalue of equity? How many shares did the firm repurchase? How many shares remained outstanding after the repurchase?What is its intrinsic per share stock price after the repurchase?If Distributedas DividendPrior toDistributionIf Distributedas Repurchase

Accepted Answer

Net income is used in either or both ways as mentioned below.

Pay as dividends to shareholders…