Corporate Finance

Does paying out cash create value?

Name: Business Tutor
Address: Burnaby, BC, CA
Telephone: +1-604-916-5838
Price range: C$30–C$129

Move dividends and buybacks to compare share prices, share counts and shareholder wealth, then explore taxes and dividend smoothing. Solve has 10 questions with editable givens and worked answers.

Getting paid · Step 1 of 12

Cash payments and extra shares do different jobs

Item	Value
Chosen method	Regular cash
Cash leaves the firm	$200,000
Share count	Unchanged
How it works	A recurring cash payment

All examples use fictional firms and numbers. Fractional shares are allowed.

Getting paid · Step 1 of 12

Cash payments and extra shares do different jobs

Mothquill Machines is a fictional firm. It can pay regular cash, a one-off special dividend, or buy back shares, also called a share repurchase. A stock dividend or split changes the share units and pays no cash.

Try it: Choose a method and follow what leaves the firm.

Payout method

Method

Regular cash

Cash paid

$200k

For the cash methods, the stated payout is $200,000.

For the stock dividend, shares = (100,000 × 1.25) = 125,000.

For the split, shares = (100,000 × 2) = 200,000.

Cash leaves the firm; investors receive cash. An open-market buyback uses the market price; a tender invites holders to sell at a stated price.

Check yourself

Which method pays no cash to shareholders?

Question 1 of 10Core

Dividend events and the buyer’s cash

All firms and numbers are invented. Fractional shares are allowed; show share counts to two decimals when needed. Keep full precision between steps; round final money to whole dollars and per-share amounts to cents. Assume a perfect market: no taxes, transaction or issue costs, or information effects; investment and borrowing stay fixed. Mothquill Machines announces a dividend of $1.50 per share. Event positions indicate order, not calendar dates or elapsed days: declaration 1, ex-dividend 3, record 5, payment 7. The seller holds these shares from before declaration until this sale, and the buyer keeps them through payment. A buyer purchases 120 shares at event position 2; an equal position means on that event. The price including the dividend right is $30.00. (a) Who receives this dividend and how much cash does the buyer receive? (b) Find the ex-dividend price. (c) Find the value of the buyer’s shares plus the dividend the buyer is entitled to once the share trades ex-dividend, ignoring the time value of money between the events. Does a lower share price by itself mean the buyer lost wealth?

Given

Editable givens

Declaration event position1

Ex-dividend event position3

Record event position5

Payment event position7

Purchase event position2

Shares owned by the holder120 shares

Price with dividend right$30

Dividend per share$1.50

Solution

Item	Value
Declaration	1
Ex-dividend	3
Record	5
Payment	7
Purchase	2

All examples use fictional firms and numbers. Fractional shares are allowed.

Read the question and the givens first. Try the first part yourself, then press Start solving and open the working to check.

Recipient; buyer cash

Ex-dividend price

Shares; total wealth

Exam coming up and dividend irrelevance still sounds wrong?

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Does paying out cash create value?

Cash payments and extra shares do different jobs

Cash payments and extra shares do different jobs

Dividend events and the buyer’s cash

Exam coming up and dividend irrelevance still sounds wrong?

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