Forum Archive Index - June 2000

["Oliver Shapleski" <oliver.shapleski@vuw.ac.nz>]

First point: No.  The example does not have buying and selling at the same
point in the cycle at all.  This is getting really tiring.... there is
nothing vaguely red or fishy about the dividend policy theory.  Your comment
about buying  ex-div is again flawed - the fundamental point I'm making is
that there SHOULDN'T BE A DIVIDEND, so you're not comparing apples with
apples when you rig the argument like that.

Second point: you don't buy on borrowings.  Shares are typically a long-term
investment and a fundamental of finance is YOU DON'T BORROW SHORT TO INVEST
LONG.

In any case, if you do borrow, you sell you shares.  If the share price
drops, then you can't repay in full obviously, but my point again is that if
the share price drops and you get a dividend, the share price would not have
dropped by as much had you not received the dividend.  You are no better off
now that you have a dividend.  Apply the theory (without your flaw addressed
in point 1) and you can calculate the result yourself.

Jeremy, you are continually missing the point.  Please have a think over the
arguments a bit more thoroughly.

An example for you:

Example:  Firm A has $100 cash.  Only asset is cash.  There are $100 shares
and each are valued at $1 plus or minus market expectations.

Firm A invests cash and its investment returns $10.  The share value should
now be $1.10 plus or minus market expectations.

Scenario 1: The company pays a 10cps dividend.

This leaves Firm A with $100 having paid a $10 dividend.  The value of the
shares is therefore $1 plus or minus market expectations.
The shareholder with one share gets 10c less tax (let's assume 25%), so 7.5c
The shareholder's wealth is therefore .075 + 1.00(+/- mkt exp)

Scenario 2: The company pays no dividend.

This leaves Firm A with $110.  The value of the shares is therefore $1.10
(+/- mkt exp)
The shareholder's wealth is therefore 1.10(+/- mkt exp)

The only circumstance when Scenario 1>2 will be when the mkt exp is
significantly negative.  E.g mky expects a 30% downgrade.  Obviously the div
won't be subject to the downgrade multiple.  I would suggest however that a
company that gives money back to shareholders when it already has a negative
multiple here will be downgraded even further as the risk of insolvency will
be proportionately higher.

Oliver


----------------------------------------------------------------------------
http://www.sharechat.co.nz/          New Zealand's home for market investors
To remove yourself from this list, please use the form at
http://www.sharechat.co.nz/forum.shtml.