MBI CORPORATE FINANCE

TOPIC FOUR
SHARE CAPITAL

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 SESSION SUMMARY
• Types of Share Capital
• Methods of Issuing Shares
• Pricing / valuation of shares
• Cost of share Issues
• Share Repurchases
• Dividend policy

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 What is a share
A share is defined as the evidence of ownership that
represents an equal proportion of a firm's capital. It
entitles its holder (the shareholder) to an equal claim
on the firm's profits and an equal obligation for the
firm's debts and losses. Two major types of shares
are (1) ordinary shares (common stock), which
entitle the shareholder to share in the earnings of
the firm as and when they occur, and to vote at the
firm's annual general meetings and other official
meetings, and (2) preference shares (preference
stock) which entitle the shareholder to a fixed
periodic income (interest) but generally do not give
him or her voting rights.

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 Types of shares
A company may have many different types of
shares that come with different conditions and
rights.
There are four main types of shares:
1. Ordinary shares are standard shares with no
special rights or restrictions. They have the
potential to give the highest financial gains,
but also have the highest risk. Ordinary
shareholders are the last to be paid if the company
is wound up.

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 2.Preference shares
Preference shares typically carry a right that gives
the holder preferential treatment when annual
dividends are distributed to shareholders. Shares in
this category receive a fixed dividend, which means
that a shareholder would not benefit from an
increase in the business' profits. However, usually
they have rights to their dividend ahead of ordinary
shareholders if the business is in trouble. Also,
where a business is wound up, they are likely to be
repaid the par or nominal value of shares ahead of
ordinary shareholders.

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 Types of shares continued
3.Cumulative preference shares give holders the
right that, if a dividend cannot be paid one year, it
will be carried forward to successive years. Dividends
on cumulative preference shares must be paid,
despite the earning levels of the business, provided
the company has distributable profits.
4.Redeemable shares come with an agreement that
the company can buy them back at a future date -
this can be at a fixed date or at the choice of the
business. A company cannot issue only redeemable
shares.
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 The difference between ordinary
shares and preference shares?
• Ordinary shares are the most common kind of
shares. An ordinary share gives the holder
voting rights in the company and entitles the
person to all dividend distributions as a part-
owner of the company.
• Preference shares allow holders to be paid
dividends before ordinary shareholders and
they also have priority over asset claims if the
company goes bust.
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 What is share capital?
Share capital or issued capital (UK English) or
capital stock (US English) refers to the portion
of a company's equity that has been obtained
(or will be obtained) by trading stock (shares)
to shareholders for cash or an equivalent item
of capital value.

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 Features of Share Capital;
• Share Capital is owned capital of the company. It is
actually the money of the shareholders since they
own the company.
• Share capital remains with the company till
liquidation; it’s the most dependable source of
finance for the joint stock companies, that is, when
capital has been fully paid before start of the business
• Share capital raises the credit worthiness of the
companies, it is also available for expansion and
diversification of business activities.
• Amendment: The amount of share capital can only be
raised by amending the capital clause of the 9
 Features of Share Capital continued
• No charge; share capital does not create a
charge on the assets of the company.
• Share capital gives shareholders an
opportunity and right to participate in the
company’s management especially through
the annual general meetings.
• Share capital gives shareholders the right of
benefit to bonus shares if any. Share capital
gives shareholders meaningful participation in
the expansion of corporate sector.

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 Types of share capital
1. Authorized capital; the total of share capital
which a limited company is allowed/authorized
to issue to its share holders. The company
cannot raise more than the amount of capital
as specified in the memorandum of
association, it’s called nominal or registered
capital. It can be decreased or increased as per
the procedure laid down in the company’s act.
It should be noted that the company need not
issue the entire authorized capital for public
subscription.

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 2.Issued Capital
This is the total of share capital issued to
shareholders.
• It is also that part of the authorized capital which
is actually issued to the public for subscription
including the shares allotted to vendors and the
signatories to the company memorandum.
• The authorized capital which is not offered for
subscription is known as un-issued capital, it
however may be offered for public subscription at
a later date

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 3.Subscribed capital;
This is the portion of the issued capital which
has been subscribed by all the investors
including the public. When the shares offered
for public subscription are subscribed fully by
the public, issued capital and subscribed
capital would be the same.

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 4.Called up Capital
This is the amount of issued capital for which
the shareholder are required to pay. It’s also
that part of subscribed capital which has been
called up on the shares. The company may
decide to call the entire amount or part of the
face value of the shares, example if the face
value of the shares allotted is 10/= and the
company has called up capital of only 7/= per
share, the remaining 3/= may be collected
from its shareholders as and when needed.

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 5.Paid-up capital
This is the amount of share capital paid up by
the share holders. It’s also the portion of the
called up capital which has been actually
received from the shareholders. When the
shareholders have paid the entire call amount,
the called up capital is the same to the paid up
capital. If any of the shareholders has not paid
amount on calls, such an amount is called “calls
in arrears”

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 6.Un-Called Capital
This is the portion of the subscribed
capital which has not yet been called-up.
As stated earlier, the company may collect
this amount any time when it needs
further funds.
.

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 7.Reserve Capital
Under this, a company may receive a portion
of its uncalled capital to be called only in the
event of winding up of the company. Such un-
called amount is called “Reserve Capital” of
the company. It is available only for the
creditors on the winding up of the company.

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 Methods of issuing shares
• The purpose of issuing shares is to control
ownership and voting rights for a company.
Shares are issued to shareholders from the
company’s share capital in the proportion that
will reflect their individual voting and ownership
rights.
Methods of bringing securities to listing for
applicants without equity securities already
listed.
These are usually referred to as Initial Public
Offers (IPOs)

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 Methods of issuing shares continued
A. An offer for sale is an invitation to the public
by, or on behalf of, a third party to purchase
securities of the issuer already in issue or
allotted. It may be in the form of an invitation to
tender at or above a stated minimum price.
B. An offer for subscription is similar to an offer
for sale, except that the securities of the issuer
are not yet in issue or allotted. The public can
apply for shares directly at a fixed price.

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 Methods of issuing shares continued
C. A placing
This is marketing of securities already in issue
but not listed or not yet in issue, to specified
persons or clients of the sponsor or any
securities house assisting in the placing, which
does not involve an offer to the public or to the
existing holders of the issuer’s securities
generally.

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 Methods of issuing shares continued
D. An intermediary’s offer is a marketing of
securities already or not yet in issue, by means
of an offer by, or on behalf of, the issuer to
intermediaries for them to allocate to their own
clients.
E. An introduction is a method of bringing
securities to a listing that does not involve an
issue of new securities or any marketing of
existing securities because the securities are
already widely held by the public

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Issuing Equity securities already listed
A. A rights issue is an offer to existing holders of
securities to subscribe or purchase further
securities on a Prorata basis (in proportion to their
holdings made by the issue of a renounceable
allotment letter or other negotiable document)
which may be traded for a period before payment
for the securities is made.
B. An open offer is an invitation to existing holders
of securities to subscribe or purchase securities in
proportion to their holdings, which is not made by
means of a renounceable allotment letter (or other
negotiable document).
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Issuing Equity securities already listed
C. An acquisition or merger issue is an issue of securities
in consideration for an acquisition of assets, or an issue of
securities on an acquisition of, or merger with, another
company as consideration for the securities of that other
company. In the case of takeovers, particularly hostile
takeovers, it is common for a cash alternative to be
available for shareholders in the offeree company. Where
shareholders in the offeree company elect for the cash
alternative rather than taking shares, the sponsor of the
issue arranges for the shares to be purchased at the
underpinning price and this can effectively amount to a
form of underwriting (we refer to such arrangements as
cash underpinnings).
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Issuing Equity securities already listed
D. A vendor consideration placing is marketing by,
or on behalf of, vendors of securities that have been
allotted as consideration for an acquisition.
E. A capitalization (or bonus) issue, also known as a
scrip issue, in lieu of dividend or otherwise is an
issue to existing holders of securities, in proportion
to their holdings, of further shares credited as fully
paid out of the reserves of the issuing company. In a
capitalization issue (other than one in lieu of
dividend) if a shareholder’s entitlement includes a
fraction of a security, that fraction must be sold for
the benefit of the shareholder

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Issuing Equity securities already listed
F. An issue for cash is an issue of securities
for cash to persons who are specifically
approved by shareholders in general
meeting or an issue pursuant to a
disapplication of the pre-emption rights

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 Valuation of shares and / companies
REASONS FOR SHARE VALUATIONS
• For Quoted companies when there is a takeover bid
and the offer price is an estimated ‘Fair Value’ in excess
of the current market price of the shares. Otherwise
the share price is determines by market conditions on
the stock exchange.
For Un-quoted companies, When
• The company wishes to get floated on stock exchange
and must fix an issue price for its shares.
• There is a proposal scheme for a merger
• Shares are to be sold
• Shares need to be valued for purposes of taxation.
• Shares are pledged as collateral for a loan.

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 Valuation of shares/ companies
• For Subsidiary companies, when the holding company
is negotiating the sale of the subsidiary to a
management Buyout team or to an external buyer.
• Usually, valuing unquoted companies presents some
special considerations. For example,
• It may not be sensible to use a P/E ratio of a quoted
company for comparative purposes because the
market value of a quoted company is likely to include a
premium to reflect marketability of its shares.
• It may not be sensible to use the Cost of Equity of a
quoted company to compare because the Cost of
capital for a quoted company is likely to be much lower
to reflect the fact that it is viewed as less risky by
investors.
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 COMMON BASES FOR VALUING
SHARES
1. Asset Based valuation method
2. Earnings Based – P/E Ratios, Earnings Yield,
ARR
3. Cash flow Based- Dividends DCF
4. Dividends Growth model

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 1. Asset Valuation Bases
• Using this method of valuation, the value of a share in
a particular class is equal to the net tangible assets
attributable to that class, divided by the number of
shares in that class. Intangible assets should be
excluded, unless they have a market value (for example
patents and copyrights which could be sold.)
• Goodwill if shown in accounts is unlikely to be shown
at a true figure for purposes of valuation and so the
value of goodwill should not be reflected in net assets
method.
• Development expenditure if shown in accounts would
have a value which is related to future profits rather
than the worth of the company’s physical assets.
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 Asset Valuation Bases
However, there are three common ways of valuing its net assets and
these include Book values, Net Realizable Values and Replacement
values.
a) The Book value method
An adjusted book value is a measure of a company's valuation after
liabilities, including off balance sheet liabilities, and assets are adjusted
to reflect true fair market value
b) Net realizable value method This is basically net realizable values of
the assets less liabilities.
c) Replacement value method This approach tries to determine what
it would cost to set up the business if it were being started now. The
value of a successful business using replacement values is likely to be
lower than its true value unless an estimate is made for the value of
goodwill and other intangible assets, such as brands. Furthermore,
estimating the replacement cost of a variety of assets of different ages
can be difficult. Therefore, of the three (3) assets-based methods, the
net realizable value method is the best method

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 Example:
To find the asset values, we start with the Balance Sheet values, and then adjust
them in the light of the information given in the question. For example:

Raspberry Ltd £ £
Land and Buildings 1,000
Plant and Machinery 400
1,400
Stocks 450
Debtors 250
Cash 100
Less
Trade Creditors 350
Bank Overdraft 150 300
Net Assets 1,700
Financed by:
Issued Share Capital (SHS 0.25 ) 500
Reserves 1,000
Shareholders Funds 1,500
Longer-Term Debt 200
1,700
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 Example
• It is thought that the land and buildings could
be sold off for £1.8m.
• The plant and machinery have a sale value of
£250,000 and a replacement cost of
£300,000.
• The balance sheet figure for stock is thought to
include £50,000 of obsolete stocks that could
be sold off for £10,000, and
• The debtors figure contains a doubtful debt of
£10,000. 32
 Solution
In the light of this information, the revised value of the assets would be:
£000s
Land and Buildings 1,800
Plant and Machinery 300
2,100
Stocks 410
Debtors 240
Cash 100
Less
Trade Creditors 350
Bank Overdraft 150 250
Net Assets 2.350
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 Solution
Notice that in adjusting the balance sheet figures:
• As in the case of land and buildings – sale value is
preferred to book value.
• But, as in the case of Plant and Machinery –
replacement cost is preferred to both sale value and
book value.
• The examiner’s thinking here is as follows: Sale value has
more economic reality than a book value; but sale value is
really a “break-up value” concept, (and invariably, we are
valuing the company as a going concern). Therefore, when
given the choice between sale value and replacement cost,
then replacement cost is more meaningful to use within a
going concern context.

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 Solution
As a result of these adjustments:
Value of the Equity = £2.35m. - £0.2m. = £2.15m
and the Value per Share = £2.15m. ÷ 2m. shares = 107.5p
Problems of Assets based valuation approach:
There are two main problems with this valuation
approach:
• In practice, realistic asset values are very difficult to
identify, and
• The technique only values the tangible assets; and
ignores the company’s intellectual assets, (or
knowledge assets) It is this second point that is the
most important.

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 The Net Asset method may be used in the following
circumstances
• As a measure of the security in a share value. A share
could be measured using an earnings basis and this
valuation could be:
– Higher than the net asset value per share, i.e. if
the company went into liquidation, the investor
could not expect to receive the full value of his
shares from sale of underlying assets.
– Lower than the net asset value per share i.e. if the
company is sold, the investor could expect to
receive the full value of his shares and perhaps
much more, when underlying assets are sold.
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 The Net Asset method
• As a measure of comparison in a merger
scheme. A merger is basically a business
combination between two or more
companies, of which none obtains control
over any other.
• As a ‘Floor value’ or reserve value for a
business that is up for sale. Shareholders will
be reluctant to sell at a value less than Net
asset value.

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2. Relative valuation techniques
This is where the value of stock is estimated
basing upon its current price relative to variables
considered to be significant to valuation such as
earnings, cash flow, and book value or sales. They
include the price to earnings ratio (P/E), the price
to cash flow ratio (P/CF), price to book value ratio
(P/BV) and the price/sales ratio (P/S). Although
there are several techniques as outlined above,
the most commonly used relative valuation
technique is the P/E ratio that we are about to
discuss

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 a) The P/E Ratio method
A) The P/E Ratio method
This is a common method of valuing a controlling interest in a
company, where the owner can decide on a dividend and
retention policy.
• Since P/E ratio = Market Value (p)
EPS
• Then the Market price per share = EPS x P/E ratio NB Please
recall that:
EPS = Profit/Loss attributable to ordinary share holders
Weighted Average number of ordinary shares in the year
• The P/E ratio produces an earnings based valuation of
shares.
• The higher the P/E ratio, the higher will be the price. A high
P/E ratio indicates;

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 A high P/E ratio indicates;
• Expectations that EPS will grow rapidly. In other words, a
high price is being paid now for future profit prospects.
• Security of Earnings, - a well established low-risk company
would be valued on a higher P/E Ratio than a similar
company whose earnings are subject to high uncertainty.
• Status; If a quoted company ( the predator) made a share
for share takeover bid, for an unquoted company(the
target), it would normally expect its own shares to be
valued on a higher P/E ratio than the target company’s
shares. This is because a quoted company ought to be a
lower risk company; and in addition there is an advantage
in holding shares which are quoted on the stock exchange,
as these can be readily sold on the secondary market.

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 P/E ratio continued
A valuation ratio of a company's current share price compared to its per-share earnings. It
is also known as the earnings multiplier model. The reasoning for this approach recalls
the basic concept that the value of any investment is the present value of future returns. In
the case of common stock, the returns that investors are entitled to receive are the net
earnings of the firm. Therefore, one way investors can estimate value is by determining
how many dollars they are willing to pay for a dollar of expected earnings (typically
represented by the estimated earnings during the 12-month period). The prevailing
multiplier or the price/ earnings ratio can be calculated as follows:

Earnings multiplier = Price/earnings ratio

= current market price ÷ Expected 12 – month earnings

OR,

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 P/E ratio
• When a company is thinking of taking over
another, it should look at the target company’s
forecast earnings, not just its historical results.
• Forecasts of earnings should only be used if;
i. There are good reasons to believe that
earnings growth will be achieved.
ii. A reasonable estimate of growth can be made
iii. Forecasts supplied by the target company’s
directors are made in good faith.

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 Example 1
If a company is currently trading at SHS.4300 a
share and earnings over the last 12 months were
SHS.195 per share, the P/E ratio for the stock
would be calculated as follows:
4300
195 = 22.05

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 Example 2
MBI 2018 ltd has paid a constant dividend of
shs.84 per share per annum for some years and is
expected to continue doing so in the future. A
current dividend is about to be paid.
Shareholders expect a return of 14% per annum
on their investment. Determine the expected
share value for MBI 2018 ltd.
• P/E = 84 ÷ 0.14 = 600
• Therefore the expected share value = 600+84
=SHS.684
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 Exercise for discussion
Assuming that the rest of the information in
example 2 above remained the same, what
would the market value be if now the
shareholders require a return of 12%?

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 P/E ratio where there is dividend
growth
The P/E ratio is also sometimes known as "price multiplier" or "earnings multiplier
model” i.e. Earnings multiplier = price/ earnings ratio
= current market price ÷ expected 12- month earnings

The infinite period dividend discount model can be used to indicate the variable s that
should determine the value of the P/E ratio as follows:
P1 = D1 / (K - G)
We use P rather than V because the value is stated as the estimated price of the stock
If we divide both sides of the equation by E1 (expected earnings during the next 12
months) the result is P1/E1 = (D1 / E1) ÷ (k-g)

Thus the earnings multiplier model implies that the P/E ratio is determined by
1. The expected dividend payout ratio (dividend divided by earnings)
2. The expected required rate of return on the stock (k)
3. The expected growth rate of dividends for the stock (g) 46
 Example 1
Assume that a particular stock has an expected dividend payout of 50%, a required rate of
return of 12%, and an expected growth rate for dividends of 8%, Calculate the stock’s
P/E ratio

Solution: D/E = 0.50, K=0.12, g =0.08

P/E = 0.50 ÷ (0.12-0.08) =0.50 ÷0.04

P/E =12.5

N.B a small difference in either k or g or both will have a large impact on the
earnings multiplier.
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 Example 2
Assume that particular stock has an expected
dividend payout of 50%, a required rate of return
of 13%, and an expected growth rate for
dividends of 8%, Calculate the stock’s P/E ratio
Solution: D/E = 0.50, K=0.12, g =0.08
• P/E = 0.50 ÷ (0.13-0.08) =0.50 ÷0.05
• P/E =10

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 Exercise for discussion
Assume that particular stock has an expected
dividend payout of 60%, a required rate of
return of 11%, and an expected growth rate
for dividends of 9 %, Calculate the stock’s P/E
ratio

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 Interpreting P/E ratio.
In general, a high P/E suggests that investors are expecting higher earnings growth in the
future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the
whole story by itself. It's usually more useful to compare the P/E ratios of one company
to other companies in the same industry, to the market in general or against the
company's own historical P/E. It would not be useful for investors using the P/E ratio as a
basis for their investment to compare the P/E of a technology company (high P/E) to a
utility company (low P/E) as each industry has much different growth prospects.

The P/E is sometimes referred to as the "multiplier", because it shows how much
investors are willing to pay per dollar of earnings. If a company were currently trading at
a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1
of current earnings.

It is important that investors note an important problem that arises with the P/E measure,
and to avoid basing a decision on this measure alone. The denominator (earnings) is
based on an accounting measure of earnings that is susceptible to forms of manipulation,
making the quality of the P/E only as good as the quality of the underlying earnings
number.

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 b) ARR method
• An ARR Valuation could be used in a takeover
when the Acquiring company is trying to assess
the maximum amount it can afford to pay.
• This method considers the ARR which will be
required from the company whose shares are to
be valued. It is different from the P/E ratio which
is concerned with the market rate of return
required. The following formula should be used;
Value = Estimated future Profits
Required return on capital employed

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 ARR method
• For a takeover bid valuation, it is often necessary
to adjust the profits figure to allow for expected
changes after the takeover. E.g. some changes in
exam questions will be;
• New levels of director’s remuneration
• New levels of interest charges ( for example if
predator will be able to replace existing loans at
lower interest rates or because the previous
owners had lent the company money at non
commercial rates.
• Effects of product rationalization and improved
management.

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 Example on ARR
Example
Chambers ltd is considering acquiring hall ltd. At present, Hall ltd is
earning on average 480,000,000 shs after tax. The directors of chambers
feel that after re-organisation, this figure could be increased to
600,000,000 shs. All companies in chambers group are expected to yield
a post tax ARR of 15% on capital employed. What should Hall ltd be
valued at?

Solution
Valuation of Hall = 600,000,000 = 4,000,000,000/=
15%
this is the maximum that chamber would be prepared to pay. The first
offer could be probably much lower than this.

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 3. CASH FLOW VALUATION METHODS
a) The Dividend yield method of share valuation
The Dividend yield method is suitable for the valuation of small share
holdings in unquoted companies. It is based on the principle that small
shareholders are mainly interested in dividends, since they cannot
control decisions affecting the company’s profits and earnings. A
suitable offer price would therefore be one, which compensates them for
future dividends they will be giving up if they sell their shares.

Dividend yield = Dividend per share x 100%

Market Value per share
Market value = Dividend
Dividend yield
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 b) The Dividend Valuation Model
• The dividend valuation model assumes that the value
of a share will be the discounted present value of all
expected future dividends on the share, discounted at
the share holder’s cost of Capital.
• When a company is expected to pay a constant
dividend every year into the future, in perpetuity, the
following formula applies
• Po = do(1+g)
ke
where Po is market price, and d is dividend.
• When a company is expected to pay a dividend which
increases at an average constant rate g, every year, the
following dividend growth model will be used.
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 The Dividend valuation model .
The value of an ordinary share will be the present value of the
expected future dividends from the particular share.
The value of an ordinary share (P0) can be expressed as
follows:
P0 = D1 + D2 + ----- D3 + Dn
(1 + Ke )1 (1+ Ke) 2 (1 +Ke)3 (1 Ke) n
• where P0 = the current market value of the share
• D = the expected future dividend in years 1 to n
• n = the number of years over which the business expects to
issue dividends
• Ke = the cost of ordinary shares to the business (that is, the
required return for investors).

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 Ordinary (equity) shares
The valuation model above can be used to
determine the cost of ordinary shares to the
business (Ke). Assuming the value of an ordinary
share and the expected future dividends are
known, the cost of an ordinary shares will be the
discount rate that, when applied to the stream of
expected future dividends, will produce a present
value that is equal to the current market value of
the share. Thus, the required rate of return for
ordinary share investors (that is, the cost of
ordinary shares to the business) is similar to the
internal rate of return (IRR) used to evaluate
investment projects.
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 Valuing shares with Zero growth in
dividends

Where:
P = the price at time 0
r = discount rate

for simplicity's sake, consider a company with a SHS.1, 000 annual dividend. If you
figure the company will pay that dividend indefinitely, you must ask yourself what you
are willing to pay for that company. Assume expected return, or, more appropriately in
academic parlance, the required rate of return is 5%. According to the dividend discount
model, the company should be worth SHS.1, 000 / .05) = SHS.20, 000

58
 Valuing shares with Zero growth in
dividends
How do we get to the formula above? It's actually just an application of the formula for a
perpetuity:

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 Dividend growth model
b) Dividend Growth Model

The obvious shortcoming of the model above is that you'd expect most companies to
grow over time. If you think this is the case, then the denominator equals the expected
return less the dividend growth rate. This is known as the constant growth DDM

The formula for valuing a company with a constantly growing dividend is as follows;

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Valuing Ordinary (equity) shares with
constant dividend growth
The first assumption is that dividends will remain
constant overtime. Where dividends are expected to
remain constant for an infinite period, the fairly
complicated equation to deduce the current market
value of a share stated above can be
reduced to,
P0 = D1
Ke
where D1 = the annual dividend per share in year 1
(which, assuming a constant dividend, will also be the
annual dividend in perpetuity.
Ke = cost of equity
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Valuing Ordinary (equity) shares with
constant dividend growth
This equation (which is the equation for
capitalizing a perpetual annuity) can be
rearranged to provide an equation for
calculating the cost of ordinary shares (ke) to
the business. Hence:
Ke = D1
P0

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Valuing Ordinary (equity) shares with
constant dividend growth
The second simplifying assumption that may be employed is that
dividends will grow at a constant rate over time. Where dividends are
expected to have a constant growth rate, the equation to deduce the
current market value of a share can be reduced to,
P0 = D1
Ke- g
where g is the expected annual growth rate. (The model assumes Ke is
greater than g).This equation can also be rearranged to provide an
equation for calculating the cost of ordinary share capital. Hence:
Ke = D1 + g
P0
This is sometimes referred to as Gordon’s growth model after the name
of the person credited with developing it.

63
 Computation of cost of equity (r)
•
using Gordon growth model
Cost of equity is comprised of shares and retained earnings
• The cost of equity can be got from The divided valuation
model;
• If the dividends are constant throughout the year,
Po or MV = d
r
Where MV = market value of shares
d = dividends per share
r = cost of capital
Making r the subject of the formula =
MV x r = d Therefore r = d
MV MV
MSC.A&F session two: capital structure 64
 Dividend growth model
It is also called the Gordon growth model
Po ( market value) = d0(1+g)
(r-g )
Where,
Po is the price per share ex-dividend
do is the dividend per share first paid
r is the cost of equity

MSC.A&F session two: capital structure 65

 Gordon growth model
r-g x mv = do(1+g)
rMV – gMV = do(1+g)
Mv(r-g) = do(1+g)
Mv MV
r-g = do(1+g)
MV
r-g+g = do(1+g) + g
MV
r = do(1+g) + g
MV
This is the formula for cost of capital Ke or r
Where r = cost of capital
do = dividends per share
g = dividend growth

MSC.A&F session two: capital structure 66

 Ex-div and cum-div
The dividend valuation model assumes that
the first payment will arise in one year’s time.
Hence the share price quoted is called ex-div.
However, if the dividend is about to be paid
,the share price is called cum-div (cum
dividend share price

MSC.A&F session two: capital structure 67

 Example 1
Target ltd paid a dividend of 25,000,000 this year.
The current return to share holders of companies in
the same industry as target plc is 12%, although it is
expected that an additional risk premium of 2% will
be applicable to Target, being a smaller and
unquoted company. Compute the value of target
ltd
a) if the current level of dividend is to continue in
perpetuity
b) if the dividend is expected to grow at a rate of 4%
pa
68
 Answer for on dividend valuation
example
Solution.

Ke = 12% +2% =14% or 0.14 Do= 25,000,000 g in ii) =4%

i) Po = Do/ke = 25,000,000 =178,571,400/=

0.14
ii) D0(1+g) =25,000,000(1+0.04) = 260,000,000/=
Ke-g 0.14-0.04
69
 Example 2
You are a director in BAT company ltd whose
Last years dividend = SHS.1, 000. The growth
rate of that company’s dividends is anticipated to
be 5% with a rate of return of 10%. Required,
calculate the value of BAT ltd.
Step 1: calculate D1.
D1 = D0 (1 + G)
D1 = SHS.1, 000 (1 + .05)
D1 = SHS.1, 000 (1.05)
D1 = SHS.1, 050

70
 Example 2 continued
Step 2: Apply the formula.
Po = D 1
(Ke - G )
Po = SHS.1, 050 / (10% - 5%)
Po = SHS.1,050 / 5%
Po = SHS.21,000
• Therefore the value of B.A.T = SHS.21,000 So, if
we want to get a 10% rate of return on our
money, and we assume that B.A.T company will
grow forever at 5% per year, then we would be
willing to pay SHS.21,000 for this stock.

71
 Example 3
Centenary rural development bank ltd has just paid a dividend of SHS.5, 000 per share
and the dividend grows at a steady rate of 6% per year. Based on this information, what
will the dividend be in 5 years?

Dt = D0 x (1 + g) t

Dt = SHS.5, 000 x (1 + 0.06)5

Dt = SHS.5, 000 x (1 .06)5

Dt = SHS.5, 000 x 1.3382

Dt = SHS.6, 691

Thus in 5 years, the dividend will grow from 5000 per share to SHS.6.691 thus growing a
total of (6,691 - 5000) = 1,691
72
 Discounted cash flow method of
share valuation
This method is most appropriate when one
company intends to buy the assets of another
company and to make further investments in
order to improve cash flows in future. (Recall all
NPV fundamentals. Positive NPV, negative NPV,
Acceptance criteria and Discounting)

73
 DCFs continued
• All of these techniques are based on the basic valuation
model which asserts that the value of an investment is
the present value of all expected future cash flows that
is, cash flows discounted to present value.
• While the concept behind discounted cash flow analysis
is simple, its practical application can be a different
matter. The premise of the discounted cash flow
method is that the current value of a company is simply
the present value of its future cash flows that are
attributable to shareholders. Its calculation is as
follows:
74
Formula for DCF

75
 Formula for DCF
OR;

= CF1/(1+i)1 + CF2/(1+i)2 + CF3 (1+i)3 + ... +CFt/(1+i)n

V0 = CFt / (1+i)n
V0 = value of asset at time zero
CFt = cash flow expected at the end of year t
I = discount rate (WACC)
N = time period

This method is widely used by business valuators and has become accepted in many legal
contexts.

76
 Example 1 on Discounted cash flow
method
Diversification ltd wishes to make a bid for Tadpole ltd. Tadpole makes
an after tax profit of 40,000,000 a year. Diversification believes that if
further money is spent on additional investments, the after tax cash
flows (ignoring purchase consideration) would be as follows

Year Cash flow ‘000’ (net of tax)

0 (100,000)
1 (80,000)
2 60,000
3 100,000
4 150,000
5 150,000

77
 Example 1 on Discounted cash flow
method
• The After tax cost of capital of Diversification
ltd is 15% and the company expects all its
investments to pay back, in discounted terms,
within five years. What is the maximum price
that company should be willing to pay for
Tadpole?

78
Solution on example 1 on Discounted
cash flow method
The maximum price is one which would make the return from the total
investment exactly 15% over the five years so that the NPV at 15% would
be zero.
Year Cash flow ‘000(net of tax) PV factor (15%) PV ‘000
0 (100,000) 1.000 (100,000)
1 (80,000) 0.870 (69,600)
2 60,000 0.756 45,360
3 100,000 0.658 65,800
4 150,000 0.572 85,800

5 150,000 0.497 74,550

Maximum purchase price 101,910
79
 Exercise for discussion
Exercise 1.

Assume a stock of your company with current dividend of SHS.100,000 per share .You
believe that over the long run, this company’s earnings and dividends will grow at 7 per
cent ,your estimate of g is 7 %, the required rate of return for this stock is 11 percent

Required, calculate the value of this stock using the dividend growth model.

80
 Valuation of preferred Stock
The owner of preferred stock receives a promise to pay a stated dividend usually each
quarter for an infinite period. As discussed earlier, Preferred stock is perpetuity because it
has no maturity. Preferred stock is defined as equity with priority over common stock
with respect to the payment of dividends and the distribution of assets in liquidation.
Preferred stock is a hybrid security which shares features with both common stock and
debt.

Preferred stock is similar to common stock in that it entitles its owners to receive
dividends which the firm must pay out of after-tax income. Moreover, the use of
preferred stock as a source of financing does not increase the probability of bankruptcy
for the firm.

However, like the coupon payments on debt, the dividends on preferred stock are
generally fixed. Also, the claims of the preferred stockholders against the assets of the
firm are fixed as are the claims of the debt holders.
81
 Valuation of preferred stock
Preferred stock has the following features:
• Par Value
The par value represents the claim of the preferred
stockholder against the value of the firm.
• Preferred Dividend / Preferred Dividend Rate
The preferred dividend rate is expressed as a
percentage of the par value of the preferred stock.
The annual preferred dividend is determined by
multiplying the preferred dividend rate times the par
value of the preferred stock.

82
 Formula for valuing preferred stock
Since the preferred dividends are generally fixed, preferred stock can be valued as a
constant growth stock with a dividend growth rate equal to zero. Thus, the price of share
of preferred stock can be determined using the following equation:

Value of Dividend (future income stream)

=
preferred share Required dividend yield (required rate of return)

Where

 Pp = the preferred stock price,

 Dp = the preferred dividend, and
 r = the required return on the stock.

83
 Example 1
Find the price of a share of preferred stock given that the par value is $100 per share, the
preferred dividend rate is 8%, and the required return is 10%.

Solution:

The price of the preferred stock would be 80 dollars

84
 Example 2
Assume that a preferred stock has a SHS. 100,000 par value and a dividend of SHS.
8,000 a year. Because of the expected rate of inflation, the uncertainty of the dividend
payment and the tax advantage to you as a corporate investor, assuming that your
required rate of return on this stock is 9 %, what would be the value of this stock?

The value of this stock would be

Pp = 8000 ÷ 0.09 = SHS.88, 888.89

Given the above estimated value, you would inquire about the current market price to
decide whether you want to buy this preferred stock or not .If the current market of the
preferred stock price is SHS.95, 000, you would decide not to buy whereas if it was
SHS.80, 000 you would buy the preferred stock.

85
 Exercise for discussion
Use the following information to determine
the price of a share of preferred stock with a
par value of SHS.100, 000 per share. The
preferred dividend rate is 2% and the required
rate of return 12%

86
 Exercise for discussion
Assuming that the rest of the information in 1
above remained the same, what would the
market value be if now the shareholders
require a return of 12%?

87
 SHARE REPURCHASES
• This is a program by which a company buys back
its own shares from the market place, reducing
the number of outstanding shares. This is usually
an indication that the company’s management
thinks the shares are undervalued.
• The rationale for share repurchase as a way of
reducing the number of shares (supply), it
increases earnings per share and tends to elevate
the market value of the remaining shares.

88
 Methods of Repurchase
There are various methods of repurchase;
1.Fixed Priced tender offer, the company makes
a formal offer to shareholders to purchase. So
many shares are typically at a sale price; this bid
price is above the current market price.
Stockholders can elect to sell their stock at the
specified price or continue to hold it. Typically,
the tender offer period is between two and
three months

89
 2.Dutch auction tender offer
Each shareholder is given the opportunity to submit to
the company the number of shares he/she is willing to
sell at a particular price. In advance, the company
specifies the number of shares it wishes to purchase as
well as the minimum and maximum price it will entertain.
Typically, the minimum price is slightly above the market
price, upon receipt of the self tenders, the company
arrays them from low to high within the range, it then
determines the lowest price which will result in the full
purchase of shares specified. The price is paid to all the
shareholders who tendered shares at that price or below.
• The fact that the price is the same may encourage
certain shareholders to submit low ask prices which
might work to the advantage of the company

90
 3. Open market repurchases;
• A company buys its stock as any other investor does
through a brokerage house but at a negotiated fee. If the
repurchase program is gradual its effect is to drive up the
price of the stock. Also, certain Securities and Exchange
Commission rules restrict the manner in which a company
bids for its shares; as a result, it takes an extended period of
time for a company to accumulate a relatively large block of
stock. For these reasons, the tender offer is more suitable
when the company seeks a large amount of stock
• Before the company repurchases stock, stock holders must
be informed of the company intentions. In a tender offer
these intentions are announced by the offer yourself. Even
here, the company must not withhold other information.

91
Open market repurchases continued;
• It would be unethical for a mining company for
example to withhold information of a substantial ore
discovery while making a tender offer to repurchase
shares.
• In open-market purchases especially, it is necessary to
disclose a company repurchase intentions. Otherwise,
stockholders may sell their stock not knowing about a
repurchase program that will increase earnings per share.
Given full information about the move of the repurchase
and objective of the company, the stockholders can sell
their stock if they choose without proper disclosure; the
selling stockholder may be penalized.

92
 Types of Repurchases:
4. Selective buy back:
This is one in which identical offers are made to every
shareholder for example if offers are made to only some
of the shareholders in the company. The scheme must
first be approved by all share holders or by a special
resolution (requiring 75% majority) of the members in
which no vote is cast by selling shareholders or their
associates. Selling shareholders may not vote in favor of
a special resolution to approve a special buy back. The
voice to the shareholders convening the meeting to
selective buy back must include a statement setting out
all material information that is relevant to the proposal,
although it is not necessary for the company to provide
the information already disclosed to the shareholders if
that would be unreasonable.
93
Types of repurchases continued
5. Employee share scheme buy back; a company
buys back shares held by or for employees or
salaried directors of the company or related
company. This type of buy back requires an ordinary
resolution.
6. On market trading; a listed company buys back
its shares in an on market trading on the stock
exchange following the passing of an ordinary
resolution. The stock exchange rules apply to on
market buy backs.
7. Minimum holding buy back; a company buys
un-marketable parcel of shares from shareholders.
This does not require a resolution but the purchased 94
 DIVIDEND POLICY
This is also known as the Earnings management decision.
Dividends are a return to the shareholders of the business.
The finance manager has to determine the amount of
earnings to be distributed to shareholders and the amount to
be retained in the firm.
• Retained earnings are a vital source of finance for the
growth of the firm and dividends on the other hand are
considered desirable to shareholders because they increase
their current wealth.
When earnings are realized, the firms can either;
• Declare all earnings as dividends and distribute them to
shareholders
• Retain all the earnings to help finance further growth
• To declare a portion as dividend and another portion to be
retained in the firm
95
 DIVIDEND POLICY
• Dividend decision is yet another crucial area of
corporate financial management. The important aspect
of dividend policy is to determine the amount of
earnings to be distributed to the shareholders and the
amount to be retained in the firm. Retained earnings
are the most significant internal sources of financing
the growth of the firm.
• There is always a question as to whether Dividends
affect the value of a share and the theoretical views to
answer this differ. On one hand, “dividends increase
the value of a share” on the other hand “dividends are
bad because they result into the payment of higher
taxes due to the difference in the ordinary income and
capital gains tax rates.

96
 Relationship between dividends and
value creation
Two theories have been advanced to explain the
relationship between dividends and the value of the
firm
i. Irrelevance theory / Neo classical theory
ii.Relevance theory / Classical / traditional theory
i. The Dividend irrelevant theory;
Advanced by Modigliani and Miller (MM), dividend
policy of the firm is irrelevant as it does not affect
the wealth of the shareholders. The theory is based
on the assumptions of a perfect capital market,
which include;
97
 i. The Dividend irrelevant theory continued:
• There are many buyers and sellers of securities
such that no single dealer can single handedly
influence the price of securities
• Information is freely available to all
• There are no transaction and floatation costs
when new issues are made
• There are no taxes both on corporate and
personal income
• Risk and Uncertainty do not exist, that is,
investors are able to forecast future prices and
dividends with certainty and one discount rate is
appropriate for all securities at all time periods

98
 The Dividend irrelevant theory
continued:
MM argue that when the above conditions exist, the
shareholders will be indifferent between current dividends
and retention of earnings (future capital gains). Current
dividends increase shareholders wealth holdings but
additional shares/bonds have to be issued to finance viable
investment projects. This will raise the risk perceived by
investors resulting from dilution of ownership and therefore
attach a high RRR hence raising the cost of capital
• On the other hand, retention of earnings for further growth
will result into a rise in wealth of the firm in future which will
be translated into a capital gain which will completely offset
the advantage of current dividends and dilution of ownership.
Investors can also manufacture their own dividends
(homemade dividends) should they require current income.

99
 i. The Dividend irrelevant theory
continued:
• It is the contention of MM that earnings be
reinvested and that dividends should only be
paid out if the firm has no profitable
investment opportunities. This in finance is
called the residual dividend (passive income
policy) decision. The reason for this is that a
firm derives value from its assets stock which
generates cash flows.

100
 The dividend relevant theory
This theory argues that the irrelevance theory is
based on unrealistic assumptions. In the real world,
markets are imperfect and uncertainty exists.
Investors will therefore perceive current dividends
as less risky than distant capital gains or future
dividends, which will have an impact on the value of
the firm. This is derived from the fact that they will
perceive less risk and therefore attach a lower RRR,
which will mean a lower cost of capital for the firm,
which also means increased value or wealth. The
relevance theorists base their arguments on the
following;

101
 Arguments of the dividend relevant
theory
a. The one bird in hand and two in the bush, uncertainty
exists and hence investors perceive current dividends as
less risky since return on Investment is guaranteed. In
this case, the discount rate increases with uncertainty. A
firm that pays dividends earlier will command a higher
value than a firm which follows a retention policy
b. Information content, that payment of dividends signals
good news to the capital market that the firm is doing
well while a firm that doesn’t pay dividends sends a
reverse message. Investors will perceive the former as
less risky and hence attach a lower RRR

102
 Arguments of the dividend relevant
theory
c. The need for diversification, different investments have
different risk profiles. Investors will prefer firms that pay
dividends so that they can diversify their portfolios and
therefore minimize their risk on investment.
d. Investors invest precisely to earn a return/dividend.
Some of these investors depend on these earnings for their
livelihood and would therefore prefer firms that pay
dividends
e. Presence of transaction costs, costs in form of
brokerage, underwriting, and others may be too high and
therefore discourage investors from making homemade
dividends.

103
 Arguments of the dividend relevant theory
F. Presence of income tax for dividends and
capital gains. For individuals, the tax on capital
gains is usually lower than tax on cash
dividends. Therefore, such an individual will
prefer retention of earnings as opposed to cash
dividend. However, for certain investment
companies like pension funds whose funds are
exempted from tax for their dividend incomes,
such investors will prefer dividend incomes to
capital gains.
104
 Dividend Policy in practice:
• Management in adopting a dividend policy must
strike a balance between the irrelevance and
relevance debate. This is because the use of
retained earnings to finance further investments
will raise future earnings per share while on the
other hand when dividends are paid, there may be
a favorable reaction in the stock market but the
firm has to forego some profitable investment
opportunities.
• A practical approach must therefore be adopted
to determine whether to pay dividends or retain
earnings.

105
 Factors to be put into consideration
before paying dividends.
1. Legal consideration - This focuses on the laws
in relation to distribution of profits. The net
profit rule states that dividends must be paid
out of earnings and not from capital Invested
(capital impairment rule). The insolvency rule
also states that a company cannot pay dividends
when declared insolvent. Therefore dividends
can only be paid out when the company has
earned profits.
106
 Factors to be put into consideration
before paying dividends
2. Availability of profitable investment
opportunities. If a firm has identified profitable
investment opportunities, it should retain earnings
but if there are none, dividends should be paid.
3. Access to capital markets - Small companies may
find it difficult to access funds from the capital
market and banking sector. In this case, retained
earnings would be preferred to paying out
dividends.
• The level of development of the capital markets
should also be put into consideration.

107
 Factors to be put into consideration
before paying dividends
4. Leverage Position of the firm. If the debt; equity
ratio is high (high leverage), the firm will encounter
difficulties in raising funds by borrowing. They will
force the firm to rely on retained earnings to
finance further Investment
5. Desire for control :This is where shareholder of
the firm fear loss of control if new issues are made,
retained earnings will be used to finance the firm's
investment opportunities and therefore little can be
available for dividends

108
 Factors to be put into consideration before
paying dividends
6. Preferences of the majority of the shareholders, in
situations where most of the shareholders prefer dividends
today than financing future investments, then the firm has to
pay dividends. In widely held companies, small shareholders
will require constant dividends, retired and old persons will
also require constant dividends. Institutional investors say
pension funds, insurance funds, and others, will prefer current
dividends because the, funds invested do not belong to them,
whereas, wealthy shareholders prefer retention of earnings
for further investment, and making capital gains to reduce on
the tax burden.
7. Restrictions in loan agreements - Lenders may generally
put restrictions on dividend payment to protect their interests
in situations when the firm is experiencing liquidity or
profitability difficulties.
109
 Factors to be put into consideration before
paying dividends
8. Management attitude towards risk - Risk averse
managers fear to contract debt and will therefore
prefer retention of earnings.
9. Income bracket of shareholders; in a progressive
tax system, if majority shareholders belong to the
high-income bracket, they'll discourage payment of
dividends because a higher portion will be slashed
by taxes and therefore prefer capital gain while
shareholders of low-income bracket would prefer
cash dividends.

110
 Dividend Payment Pattern
1. Constant sum per share - In this pattern, a company pays a
constant sum of money for every share held. For example a firm
may declare to pay Shs.15, 000 for each share per year as dividend.
This is a relatively stable policy. Whether profits have fluctuated or
not, it Is paid. This policy is normally preferred by shareholders who
depend on dividend income to meet their expenses e.g. pensioners.
However, this policy can be a disadvantage to the financial manager
in cases where there are sharp declines in earnings e.g. in a
recession.
2. Constant payout' ratio - Here, the percentage of earnings paid out
in dividends is held constant example a company may declare that
10% of earnings should be paid out as dividend every year. It Is vital
to note that much as the dividend ratio is stable, the actual amount of
dividend fluctuates from year to year as the profits fluctuate. This
policy is likely to create some uncertainty in the minds of the
investors.

111
 Dividend Payment Pattern
3. A small regular dividend per year plus extra in
good years. A company may decide to pay a
small regular dividend per year say SHS. 3,000
per share plus extra dividend in periods of boom
for example an extra 1% of earnings if they
exceed a given amount. This policy is normally
preferred by companies with fluctuating
earnings. The small fixed dividend reduces the
uncertainty of them missing dividend in a given
year.

112
 Stability of Dividend Payment
Does the dividend payment pattern matter? One of the
arguments advanced for the relevance of dividends is that it
resolves uncertainty in the minds of investors. Thus, dividend
payment has an implication on the value of the firm. Financial
managers have a stable dividend pattern. The justification
being that:
 A stable dividend policy may convey valuable information
to the market about the firm's future.
 There are some investors who depend on dividend to meet
their personal needs for example pensioners.
 Institutional investors such as pension funds, insurance
companies, mutual funds etc., can only invest in companies,
which pay stable dividends. This is because such companies
use pensioner’s fund, premiums of customers etc.

113
 Forms of Dividends
I. Cash dividends: Companies normally pay dividends
in form of cash. Firms that pay dividends in cash
should have sufficient cash on their bank accounts or
should prepare to liquidate the near cash assets (T.
B's).
II.Stock dividends / bonus issue - This is where
additional shares are issued to shareholders instead of
a cash dividend for example if a 10% stock dividend is
declared, that means that an Investor with 200 shares
will receive 20 additional shares. This Is obtained by
10/100 x 200 = 20. Therefore, the investor has 220
shares. This reduces the reserves account while raising
the share capital account. Thus, the total net worth
remains unchanged.

114
 Example on Stock dividends / bonus
issue
e.g. if a 10% stock dividend is declared, that means that an
investor with 10 shares will receive an additional share.
This is obtained by 10/100 x 10 = 1.
Therefore, the investor has 11 shares. This reduces the
reserves account while raising the share capital account.
Thus, the total net worth remains unchanged. Suppose a
company ABC Ltd has the following capital structure;
Share capital 1000 shares at Shs.20, 000 each=20,000,000
Share premium 5,000,000
Reserves and surpluses 20,000,000
Total capitalization 45,000,000

115
 Bonus issue
Advantages of bonus shares:
To shareholders
• Tax benefit – cash dividends are taxed but bonus
dividends are not taxed unless these shares are sold
thereby attracting capital gains tax which is usually
lower than income tax.
• Indication of higher future profits.
• Future dividends may increase.
• Psychological value.

116
 Bonus issue
Advantages to the company:
• Conservation of cash that may be used to
finance profitable investment opportunities.
• Only means of to pay dividend under financial
difficulty and contractual restrictions
• More attractive share price

117
 Bonus issue
Limitations of bonus shares
• Bonus shares do not give any extra or special
benefit to a shareholder. Its proportionate
ownership in the company does not change
either.
• Bonus shares are more costly to administer
than a cash dividend.
• There is a problem of adjusting EPS and P/E
ratio.
118
 Forms of Dividends
III.Stock splits - Here; the number of shares
is raised through a proportional reduction in
the face value of the shares. The Effect of
this is that the face value and the number of
outstanding shares change, but the total
shareholder funds remain unchanged.

119
 Example on stock split
DMC Ltd has the following capital structure;
Share capital 2000 shares at Shs.10, 000 each 20,000,000
Share premium 4,000,000
Reserves and surpluses 10,000,000
34,000,000
If a 2 for 1 stock split is declared, this means that each share
held is exchanged for 2 shares as the price per share is halved
i.e face value reduces while the number of shares rises. For
DMC Ltd., new capitalization would be
Share capital 4000 shares at Shs.5, 000 each 20,000,000
Share premium 4,000,000
Reserves and surpluses 10,000,000
34,000,000
120
 Reverse splits
Reverse splits are the opposite of stock splits.
Reverse splits is where the number of shares is
reduced so as to raise the value of the shares. E.g. in
the above example, if a 1 for 2 reverse split is
declared, then the new capitalization would be;
Share capital 1000 shares at Shs.20, 000= 20,000,000
Share premium 4,000,000
Reserves and surpluses 10,000,000
34,000,000

121
Rationale for Stock Dividends and
Splits:
i. The main objective of a stock split is to reduce the market
price of the share in order to make it attractive especially to
small investors.
ii. If a company is encountering cash problems, It can
substitute cash dividend with stock dividend.
iii.Share splits are used by companies to communicate to
Investors that the company, is expected to earn higher
profits. The share split, like bonus issue has an information
value, that the firm is expected to perform efficiently and
profitably and that the shares have been split to avoid
future high price per share that may place the company
outside the popular trading range.
iv.Tax benefits. Cash dividends are taxed at personal income
tax rates unlike stock dividends, which are not taxable.

122
 Rationale for Stock Dividends and
Splits:
V. Psychological value - when a stock dividend is'
declared, it is usually associated with prosperity of the
company. 'Shareholders can sell part of their bonus
shares to meet their current income needs.
Vi. Where there are restrictive loan agreements on
cash dividends by long-term creditors, a stock
dividend can be used to satisfy the shareholders’
desires.

123
END OF TOPIC 4

124