1、,Chapter 17,Principles of Corporate FinanceNinth Edition,Payout Policy,Topics Covered,Understand dividend types and how they are paid Understand the issues surrounding dividend policy decisions Understand the difference between cash and stock dividends Understand why share repurchases are an alterna
2、tive to dividends,17-2,Figure 17.1 Uses of Free Cash Flow,A firm can retain its free cash flow, either investing or accumulating it, or pay out its free cash flow through a dividend or share repurchase. The choice between these options is determined by the firms payout policy.,Payout Policies,Cash D
3、ividend,vs.,Stock Repurchase,Dividend & Stock Repurchases,$ Billions,U.S. Data 1980 - 2005,Dividend Payments,Record Date - Person who owns stock on this date received the dividend.,Ex-Dividend Date - Date that determines whether a stockholder is entitled to a dividend payment; anyone holding stock b
4、efore this date is entitled to a dividend.,Cash Dividend - Payment of cash by the firm to its shareholders.,Dividend Payments,Stock Repurchase - Firm buys back stock from its shareholders.,Stock Dividend - Distribution of additional shares to a firms stockholders.,Stock Splits - Issue of additional
5、shares to firms stockholders.,Does Dividend Policy Matter?,Firm,Old stockholders,New stockholders,New stockholders,Old stockholders,Shares,Cash,Cash,Cash,Shares,Dividend financed by stock issue,No dividend, no stock issue,18-9,Does Dividend Policy Matter?,Dividends matter the value of the stock is b
6、ased on the present value of expected future dividends Dividend policy may not matter Dividend policy is the decision to pay dividends versus retaining funds to reinvest in the firm In theory, if the firm reinvests capital now, it will grow and can pay higher dividends in the future,18-10,Illustrati
7、on of Irrelevance,Consider a firm that can either pay out dividends of $10,000 per year for each of the next two years or can pay $9000 this year, reinvest the other $1000 into the firm and then pay $11,120 next year. Investors require a 12% return. Market Value with constant dividend = $16,900.51 M
8、arket Value with reinvestment = $16,900.51 If the company will earn the required return, then it doesnt matter when it pays the dividends,Test,True or false: dividends are irrelevantTrue or false: dividends policy are irrelevant,18-12,Low Payout Please,Why might a low payout be desirable? Individual
9、s in upper income tax brackets might prefer lower dividend payouts, given the immediate tax liability, in favor of higher capital gains with the deferred tax liability the amount of capital that needed by increasing the equity Dividend restrictions debt contracts might limit the percentage of income
10、 that can be paid out as dividends Control the company,18-13,High Payout Please,Why might a high payout be desirable?Free cash flow and less investment project Desire for current income Individuals that need current income, i.e. retirees Taxes Dividend exclusion for corporations,18-14,Dividends and
11、Signals,Changes in dividends convey information Dividend increases Good news! Expectation of higher future dividends, increasing present value Signal of a healthy, growing firm Dividend decreases Bad news! Expectation of lower future dividends indefinitely; decreasing present value Signal of a firm
12、that is having financial difficulties,18-15,Dividend Policy in Practice,Residual dividend policy Constant growth dividend policy dividends increased at a constant rate each year Constant payout ratio pay a constant percent of earnings each year Compromise dividend policy,18-16,Example Residual Divid
13、end Policy,Given Need $5 million for new investments Target capital structure: D/E = 2/3 Net Income = $4 million Finding dividend 40% financed with debt (2 million) 60% financed with equity (3 million) NI equity financing = $1 million, paid out as dividends,18-17,Stock Repurchase,Company buys back i
14、ts own shares of stock Tender offer company states a purchase price and a desired number of shares Open market buys stock in the open marketSimilar to a cash dividend in that it returns cash from the firm to the stockholders,18-18,Real-World Considerations,Stock repurchase allows investors to decide
15、 if they want the current cash flow and associated tax consequences In our current tax structure, repurchases may be more desirable due to the options provided stockholders The IRS recognizes this and will not allow a stock repurchase for the sole purpose of allowing investors to avoid taxes,18-19,I
16、nformation Content of Stock Repurchases,Stock repurchases send a positive signal that management believes that the current price is low Tender offers send a more positive signal than open market repurchases because the company is stating a specific price The stock price often increases when repurcha
17、ses are announced,18-20,Stock Dividends,Pay additional shares of stock instead of cash Increases the number of outstanding shares but share price Small stock dividend Less than 20 to 25% If you own 100 shares and the company declared a 10% stock dividend, you would receive an additional 10 shares La
18、rge stock dividend more than 20 to 25%,18-21,Stock Splits,Stock splits essentially the same as a stock dividend except expressed as a ratio For example, a 2 for 1 stock split is the same as a 100% stock dividend Stock price is reduced when the stock splits Common explanation for split is to return p
19、rice to a “more desirable trading range”,Taxes and Dividend Policy,In U.S., shareholders are taxed twice (figures in dollars),Taxes and Dividend Policy,Under imputed tax systems, such as that in Australia, Shareholders receive a tax credit for the corporate tax the firm pays (figures in Australian dollars),
