RJ Nobel
Nobel Research and Development
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Posted - 2009.07.05 00:01:00 -
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I have the bizarre desire to illustrate some of the financial terminology as commonly used in MD. Bear with me  .
How do you determine share dividends?
Dividends are paid from the assets of the business. If the dividend rate was set at launch (for example “4% per month”), then the dividend is simply share purchase price * .04. If the shares were purchased for 1 million each, then the dividend should be 40,000 per share. If the dividend is based on the profit of the business, then the dividend is calculated: profit / 10,000 shares = dividend per share. To illustrate, if the mothership was built for a cost of 12 billion and sold for 14 billion, then the profit is 2 billion and the per-share dividend is 200,000.
Lets say that the corporation intends to keep 10% of the profit and distribute 90% to the investors. This means that 200 million is being kept by the corporation and 1.8 billion is being distributed: a per-share dividend of 180,000. After paying dividends the corporation has 12 billion - just enough to start building another mothership.
The difference between dividend and share buyback:
In your example, the corporation intends to keep 10% of the NAV and distribute 90% to the investors. Since this would remove your ownership stake, the appropriate terminology would be a share buyback – the corporation is offering a set price for your shares. In this case, the set price is the NAV – 10% / 10,000 shares = 1.26 million per share.
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So is that all above correct?
Yes, your numbers are correct. I just added some terminology and fluffy explanations. Sorry.
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and then, using that as a model, what would the shares need to sell for, and how much actual profit are the shareholders looking at?
The shares should sell for the buyback price of 1.26 million per share – unless you can find someone who is willing to pay a premium in order to own the shares.
The shareholder “profit” depends on how much you paid for the shares. If, for example, you paid 1 million per share, then your profit is 260,000 per share (sale price - purchase price).
I hope this adequately answers your questions.
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