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From: z@rocksvax.UUCP
Newsgroups: net.invest
Subject: Re: Corporate borrowing to finance divid
Message-ID: <13600002@rocksvax.UUCP>
Date: Tue, 18-Jun-85 21:03:00 EDT
Article-I.D.: rocksvax.13600002
Posted: Tue Jun 18 21:03:00 1985
Date-Received: Thu, 20-Jun-85 03:45:49 EDT
References: <8021@ucbvax.UUCP>
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Nf-ID: #R:ucbvax:-802100:rocksvax:13600002:000:1076
Nf-From: rocksvax!z    Jun 18 21:03:00 1985

There are many people who invest in corporations with large capital gain
potential because of the tax advantage you mentioned.  But there are also
a large number of investors who invest in stocks purely because they provide
a steady return on investment.  The wealthy retiree is a primary example.
These people depend on a consistent payment of dividends as their income.

A steady dividend is an important feature of a stock.  Another important factor
in a stock's price is the income per share.  Thus it may be advantageous
for a corporation to borrow money even while paying steady dividends.  For
example let us say a corporation earns $2M per year on an investment base of
$10M  ($1 par value stock).  If all the $10M came from stock the corporation
would be producing a income per share of $.20.  But if $5M was borrowed
at say 10% (an old loan!) then $.5M would go to loan service leaving $1.5M
income to be spread among the 5M outstanding shares or an income per
share of $.30!
--
//Z\\
James M. Ziobro
Ziobro.Henr@Xerox.COM
{rochester,amd,sunybcs,allegra}!rocksvax!z