How does initiation of dividend affect the cost of equity?
reduces it. Require less return on your equity.
Is there a similiar rule for bond: Issuing coupon vs. zero-coupon bond will reduce the cost of debt?
isn’t dividend included as part of cost of equity? i don’t think it should have any effect.
zero-coupon bonds don’t reduce cost of debt. issuer still has to pay back par at expiration so the amortization of the discount still represents a cost to issuer, and should be equal to cost of coupon bond, all else equal.
jankynoname Wrote: ------------------------------------------------------- > isn’t dividend included as part of cost of equity? > i don’t think it should have any effect. If you initiate a dividend, your required rate of return should go down, so P/E = D/E / (r - g) r goes down, P/E goes up. At least, this is the theory in corporate finance (meaning it’s wrong in real life)
But doesn’t g also go down? sustainable growth = retention ratio * ROE initiation of dividend lowers retention ratio, => g falls. So I’m not sure why P/E goes up with dividend intiation, besides the signalling effect maybe. Still not seeing why req return on equity would go down??
Signaling effect. page 169 CFAI
dividend paying stock is considered lower risk (bird in hand theory lol), lower risk leads to lower cost of equity. In theory dividend payout should not affect cost of equity except as noted above.
If a company initiates dividends and the shareholders feel that they did that as they do not have good +NPV projects in hand. Does it signal a good or a bad wave?