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1、,Chapter 17,Principles of Corporate Finance Ninth 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 altern
2、ative 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
3、Dividend,vs.,Stock Repurchase,Dividend anyone holding stock before 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
4、 to a firms stockholders.,Stock Splits - Issue of additional 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 Dividen
5、d Policy Matter?,Dividends matter the value of the stock is based 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 gro
6、w and can pay higher dividends in the future,18-10,Illustration 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 1
7、2% return. Market Value with constant dividend = $16,900.51 Market 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 irrelevant True or false: dividends policy are irrelevant,18-12,Low
8、 Payout Please,Why might a low payout be desirable? Individuals 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 re
9、strictions debt contracts might limit the percentage of income 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
10、 Taxes Dividend exclusion for corporations,18-14,Dividends and 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 div
11、idends indefinitely; decreasing present value Signal of a firm 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 ea
12、ch year Compromise dividend policy,18-16,Example Residual Dividend 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, p
13、aid out as dividends,18-17,Stock Repurchase,Company buys back its own shares of stock Tender offer company states a purchase price and a desired number of shares Open market buys stock in the open market Similar to a cash dividend in that it returns cash from the firm to the stockholders,18-18,Real-
14、World Considerations,Stock repurchase allows investors to decide 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 f
15、or the sole purpose of allowing investors to avoid taxes,18-19,Information 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 statin
16、g a specific price The stock price often increases when repurchases 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 Large stock dividend more than 20 to 25%,18-21,Stock Splits,Stock splits essentially the same as a stock dividend except expres
