practice final question on stock split

[beck]

hi guys, i have a question about neas' "Corporate finance, Stocks, Splits and Dividends, practice exam problems" ( http://www.neas-seminars.com/discussions/shwmessage.aspx?ForumID=63&MessageID=5362 )

on question 1.4, it says "On September 17, the stock pays a 10% cash dividend.", so shouldn't the stock price go down due to this? which would make the answer to be A instead of B...

just not so sure if there is any difference between cash dividend in a dollar amount or a percentage...

thx guys~ :crazy:

[cincinnatikid]

hi guys, i have a question about neas' "Corporate finance, Stocks, Splits and Dividends, practice exam problems" ( http://www.neas-seminars.com/discussions/shwmessage.aspx?ForumID=63&MessageID=5362 )

on question 1.4, it says "On September 17, the stock pays a 10% cash dividend.", so shouldn't the stock price go down due to this? which would make the answer to be A instead of B...

just not so sure if there is any difference between cash dividend in a dollar amount or a percentage...

thx guys~ :crazy:

"The investor reinvests the cash dividend in more shares of the stock."

The decrease in price/share is offset by the increase in the # of shares.

:tup:

[beck]

"The investor reinvests the cash dividend in more shares of the stock."

The decrease in price/share is offset by the increase in the # of shares.

:tup:


oooo.... so i think the "more shares" they buy are newly issued, right?? otherwise the firm's value won't increase and there would be no offsetting...

so they got the money from the firm (by cash dividend) and return the money to the firm (by buying more newly issued shares)..... what a good use of time for the investors ;)
thx alot :wave:

[cincinnatikid]

"The investor reinvests the cash dividend in more shares of the stock."

The decrease in price/share is offset by the increase in the # of shares.

:tup:


oooo.... so i think the "more shares" they buy are newly issued, right?? otherwise the firm's value won't increase and there would be no offsetting...

so they got the money from the firm (by cash dividend) and return the money to the firm (by buying more newly issued shares)..... what a good use of time for the investors ;)
thx alot :wave:

The company doesn't have to issue any new shares. The question is about the investors funds, not the company's equity.

I think you are confusing the company and the investor here....

The company pays a cash dividend, and the value of the stock goes down accordingly. The company has less equity as a result.

The investor takes the cash dividend and buys more stock in the market with the proceeds. The loss of value from the stock is offset by the dividend payment, and the dividend payment equals the value of stock purchased from the market. At the end of it all, the investor has more shares worth less money per share, but still has the same total dollars.

[beck]

yes.yes... i was thinking about the value of stock of that FIRM instead of the investor... i see it now :crazy: