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An Option‐Theoretic Approach to the Valuation of Dividend Reinvestment and Voluntary Purchase Plans
Author(s) -
DAMMON ROBERT M.,
SPATT CHESTER S.
Publication year - 1992
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1992.tb03988.x
Subject(s) - dividend , valuation (finance) , shareholder , share price , business , stock price , financial economics , stock (firearms) , economics , monetary economics , actuarial science , finance , microeconomics , stock exchange , corporate governance , mechanical engineering , paleontology , series (stratigraphy) , engineering , biology
Many firms with dividend reinvestment plans also allow their shareholders to voluntarily invest supplemental funds to purchase additional shares. The purchase price for newly‐issued shares often is determined by the average stock price over a prespecified time period preceding the investment date. This gives the firm's shareholders an option to invest in additional shares only when the stock price exceeds the computed average. This paper uses both theoretical and numerical methods to analyze the value of these voluntary purchase options in theory and practice.