AN OPTION-THEORETIC APPROACH TO THE VALUATION OF DIVIDEND REINVESTMENT AND VOLUNTARY PURCHASE PLANS

Many firms with dividend reinvestment plans also allow their sharehold ers to voluntarily invest supplemental funds to purchase additional sh ares. The purchase price for newly-issued shares often is determined b y the average stock price over a prespecified time period preceding th e investment date. This gives the firm's shareholders an option to inv est in additional shares only when the stock price exceeds the compute d average. This paper uses both theoretical and numerical methods to a nalyze the value of these voluntary purchase options in theory and pra ctice.