Question

5. Microsoft's Dividend. In January 2003, Microsoft announced that it would begin paying a dividend of $0.16 per share. Given the following share prices for Microsoft stock in the recent past, how would a con- stant dividend of $0.16 per share per year have changed the company's average annual return to its sharehold- ers over this period? First Closing Trading Day Share Price 1998 (Jan 2) $131.13 1999 (Jan 4) $141.00 2000 (Jan 3) $116.56 First Closing Trading Day Share Price 2001 (Jan 2) $43.38 2002 (Jan 2) $67.04 2003 (Jan 2) $53.72

Answer 1

ANSWER:

In case of a publicly traded firm, the shareholders have certain returns that is a combination of current income in the form of dividends and capital gains which are available from appreciation of the company's share price. The formula for shareholder return is: Dividend P.-P ShareholderReturn = PP Where, P. Initial price that is equivalent to the initial investment by a shareholder P, Price of the share at the end of the period

Shareholder 1 Assumptions Closing Share Price If Dividend Paid Shareholder Return (without Div) Return (with Div) 1998 (January $131.13 1999 (January B3-B2 B2 $141.00 $0.16 C3+B3-B2 B2 = 7.65% = 7.53% 2000 (January B4-B3 B3 $116.56 $ 0.16 C4+ B4-B3 B3 =-17.22% =-17.33%

B5-B4 C5+ B5-B4 2001 (January $43.38 $0.16 B4 B4 =-62.78% =-62.65% 2002 (January B6-B5 B5 $67.04 $0.16 C6+ B6-B5 B5 = 54.91% =54.54% B7-B6 B6 C7+B7-B6 2003 (January $53.72 $ 0.16 B6 =-19.87% = -19.63%

The average shareholder return for the period is calculated as follows: Average shareholder return for the period: D3+04+05+D+D7 Average shareholder return = Substitute the values in the formula: Average shareholder return = 7.53 +(-17.33)+(-62.78) +54.54 +(-19.87) -37.91 5 = (7.58%) The average shareholder return is -7.58% Total shareholder return if Microsoft had paid a constant dividend is calculated by the formula: E3+4+ES+E6+E7 Total shareholder return = Substitute the values in the formula: 7.65+(-17.22)+(-62.65) + 54.91+(-19.63) Total shareholder return = _-36.94 = -7.388 The total shareholder return is -7.388