公司理财（英文版·第5版）课件 第17章　股利分配政策

CorporateFinanceFifthEditionChapter17PayoutPolicyCopyright©2020,2017,2014PearsonEducation,Inc.

AllRightsReservedChapterOutline17.1

DistributionstoShareholders17.2

ComparisonofDividendsandShareRepurchases17.3

TheTaxDisadvantageofDividends17.4

DividendCaptureandTaxClienteles17.5

PayoutVersusRetentionofCash17.6

SignalingwithPayoutPolicy17.7

StockDividends,Splits,andSpin-OffsLearningObjectives(1of3)Listtwowaysacompanycandistributecashtoitsshareholders.Describethedividendpaymentprocessandtheopen-marketrepurchaseprocess.Definestocksplit,reversestocksplit,andstockdividend;describetheeffectofthoseactionsonstockprice.Discusstheeffectofdividendpaymentorsharerepurchaseinaperfectworld.LearningObjectives(2of3)Assumingperfectcapitalmarkets,describewhatModiglianiandMiller(1961)foundaboutpayoutpolicy.Discusstheeffectoftaxesondividendpolicy;computetheeffectivedividendtaxrate.Providereasonswhyfirmsmightaccumulatecashbalancesratherthanpaydividends.LearningObjectives(3of3)Describetheeffectofagencycostsonpayoutpolicy.Assesstheimpactofinformationasymmetryonpayoutpolicy.17.1DistributiontoShareholdersPayoutPolicyThewayafirmchoosesbetweenthealternativewaystodistributefreecashflowtoequityholdersFigure17.1UsesofFreeCashFlowDividends(1of4)DeclarationDateThedateonwhichtheboardofdirectorsauthorizesthepaymentofadividend.RecordDateWhenafirmpaysadividend,onlyshareholdersonrecordonthisdatereceivethedividend.Dividends(2of4)Ex-dividendDateAdate,twodayspriortoadividend’srecorddate,onorafterwhichanyonebuyingthestockwillnotbeeligibleforthedividend.PayableDate(DistributionDate)Adate,generallywithinamonthaftertherecorddate,onwhichafirmmailsdividendcheckstoitsregisteredstockholders.Figure17.2ImportantDatesforMicrosoft’sSpecialDividendDividends(3of4)SpecialDividendAone-timedividendpaymentafirmmakes,whichisusuallymuchlargerthanaregulardividendStockSplit(StockDividend)WhenacompanyissuesadividendinsharesofstockratherthancashtoitsshareholdersFigure17.3DividendHistoryforGMStock,1983–2008Dividends(4of4)ReturnofCapitalWhenafirm,insteadofpayingdividendsoutofcurrentearnings(oraccumulatedretainedearnings),paysdividendsfromothersources,suchaspaid-in-capitalortheliquidationofassetsLiquidatingDividendAreturnofcapitaltoshareholdersfromabusinessoperationthatisbeingterminatedShareRepurchases(1of5)Analternativewaytopaycashtoinvestorsisthroughasharerepurchaseorbuyback.Thefirmusescashtobuysharesofitsownoutstandingstock.ShareRepurchases(2of5)OpenMarketRepurchaseWhenafirmrepurchasessharesbybuyingsharesintheopenmarketOpenmarketsharerepurchasesrepresentabout95%ofallrepurchasetransactions.ShareRepurchases(3of5)TenderOfferApublicannouncementofanoffertoallexistingsecurityholderstobuybackaspecifiedamountofoutstandingsecuritiesataprespecifiedprice(typicallysetata10%to20%premiumtothecurrentmarketprice)overaprespecifiedperiodoftime(usuallyabout20days).Ifshareholdersdonottenderenoughshares,thefirmmaycanceltheoffer,andnobuybackoccurs.ShareRepurchases(4of5)DutchAuctionAsharerepurchasemethodinwhichthefirmlistsdifferentpricesatwhichitispreparedtobuyshares,andshareholdersinturnindicatehowmanysharestheyarewillingtosellateachprice.Thefirmthenpaysthelowestpriceatwhichitcanbuybackitsdesirednumberofshares.ShareRepurchases

(5of5)TargetedRepurchaseWhenafirmpurchasessharesdirectlyfromaspecificshareholderGreenmailWhenafirmavoidsathreatoftakeoverandremovalofitsmanagementbyamajorshareholderbybuyingouttheshareholder,oftenatalargepremiumoverthecurrentmarketprice17.2ComparisonofDividendsandShareRepurchasesConsiderGenronCorporation.Thefirm’sboardismeetingtodecidehowtopayout$20millioninexcesscashtoshareholders.Genronhasnodebt,itsequitycostofcapitalequalsitsunleveredcostofcapitalof12%.AlternativePolicy1:PayDividendwithExcessCash(1of5)With10millionsharesoutstanding,Genronwillbeabletopaya$2dividendimmediately.Thefirmexpectstogeneratefuturefreecashflowsof$48millionperyear;thus,itanticipatespayingadividendof$4.80pershareeachyearthereafter.AlternativePolicy1:PayDividendwithExcessCash(2of5)Cum-dividendWhenastocktradesbeforetheex-dividenddate,entitlinganyonewhobuysthestocktothedividendThecum-dividendpriceofGenronwillbeAlternativePolicy1:PayDividendwithExcessCash(3of5)Aftertheex-dividenddate,newbuyerswillnotreceivethecurrentdividendandthesharepriceandthepriceofGenronwillbeAlternativePolicy1:PayDividendwithExcessCash(4of5)blankDecember11(Cum-Dividend)December12(Ex-Dividend)Cash200Otherassets400400Totalmarketvalue420400Shares(millions)1010shareprice$42$40AlternativePolicy1:PayDividendwithExcessCash(5of5)Inaperfectcapitalmarket,whenadividendispaid,thesharepricedropsbytheamountofthedividendwhenthestockbeginstotradeex-dividend.AlternativePolicy2:ShareRepurchase(NoDividend)(1of6)Supposethatinsteadofpayingadividendthisyear,Genronusesthe$20milliontorepurchaseitssharesontheopenmarketWithaninitialsharepriceof$42,Genronwillrepurchase476,000shares.

Thiswillleaveonly9.524millionsharesoutstanding.

AlternativePolicy2:ShareRepurchase(NoDividend)(2of6)Theneteffectisthatthesharepriceremainsunchanged.BlankDecember11(BeforeRepurchase)December12(AfterRepurchase)Cash200Otherassets400400Totalmarketvalueofassets420400Shares(millions)109.524shareprice$42$42AlternativePolicy2:ShareRepurchase(NoDividend)(3of6)Genron’sFutureDividendsItshouldnotbesurprisingthattherepurchasehadnoeffectonthestockprice.Aftertherepurchase,thefuturedividendwouldriseto$5.04pershare

Genron’ssharepriceisAlternativePolicy2:ShareRepurchase(NoDividend)(4of6)Genron’sFutureDividendsInperfectcapitalmarkets,anopenmarketsharerepurchasehasnoeffectonthestockprice,andthestockpriceisthesameasthecum-dividendpriceifadividendwerepaidinstead.AlternativePolicy2:ShareRepurchase(NoDividend)(5of6)InvestorPreferencesInperfectcapitalmarkets,investorsareindifferentbetweenthefirmdistributingfundsviadividendsorsharerepurchases.Byreinvestingdividendsorsellingshares,theycanreplicateeitherpayoutmethodontheirown.AlternativePolicy2:ShareRepurchase(NoDividend)(6of6)InvestorPreferencesInthecaseofGenron,ifthefirmrepurchasessharesandtheinvestorwantscash,theinvestorcanraisecashbysellingshares.Thisiscalledahomemadedividend.Ifthefirmpaysadividendandtheinvestorwouldpreferstock,theycanusethedividendtopurchaseadditionalshares.TextbookExample17.1(1of2)HomemadeDividendsProblemSupposeGenrondoesnotadoptthethirdalternativepolicy,andinsteadpaysa$2dividendpersharetoday.Showhowaninvestorholding2,000sharescouldcreateahomemadedividendofyearonherown.TextbookExample17.1(2of2)SolutionIfGenronpaysa$2dividend,theinvestorreceives$4,000incashandholdstherestinstock.Toreceive$9,000intotaltoday,shecanraiseanadditional$5,000byselling125sharesat$40persharejustafterthedividendispaid.Infutureyears,Genronwillpayadividendof$4.80pershare.Becauseshewillowntheinvestorwillreceivedividendsofyearfromthenon.AlternativeExample17.1(1of2)ProblemYouown1,000sharesinafirmthathashistoricallypaiddividendsatarateof50%ofearningspershare.Althoughearningspersharethisyearare$5,thefirmhasdecidedtoretainalloftheearningsandnotpayadividend.Thecurrentmarketpriceis$50pershare.Howcouldyoucreateahomemadedividendbasedonthefirm’sdividendhistory?AlternativeExample17.1

(2of2)SolutionBasedonthefirm’shistory,its“normal”dividendwouldhavebeenpershare.Tocreateahomemadedividend,youneedtosellenoughsharestogeneratethedesiredcashflow.ThisequatestoGivenacurrentmarketvalueof$50pershare,youwouldneedtosellsharestocreatethedesiredhomemadedividend.AlternativePolicy3:HighDividend(EquityIssue)(1of3)SupposeGenronwantstopaydividendlargerthan$2persharerightnow,butitonlyhas$20millionincashtodayThus,Genronneedsanadditional$28milliontopaythelargerdividendnow.Todothis,thefirmdecidestoraisethecashbysellingnewshares.AlternativePolicy3:HighDividend(EquityIssue)(2of3)Givenacurrentsharepriceof$42,Genroncouldraise$28millionbyselling0.67millionshares.

Thiswillincreasethetotalnumberofsharesto10.67million.AlternativePolicy3:HighDividend(EquityIssue)(3of3)ThenewdividendpersharewillbeAndthecum-dividendsharepricewillbeAgain,thesharevalueisunchanged.Modigliani-MillerandDividendPolicyIrrelevance(1of2)Thereisatradeoffbetweencurrentandfuturedividends.IfGenronpaysahighercurrentdividend,futuredividendswillbelower.IfGenronpaysalowercurrentdividend,futuredividendswillbehigher.Table17.1Genron’sDividendsperShareEachYearUndertheThreeAlternativePoliciesModigliani-MillerandDividendPolicyIrrelevance(2of2)MMDividendIrrelevanceInperfectcapitalmarkets,holdingfixedtheinvestmentpolicyofafirm,thefirm’schoiceofdividendpolicyisirrelevantanddoesnotaffecttheinitialshareprice.DividendPolicywithPerfectCapitalMarketsAfirm’sfreecashflowdeterminesthelevelofpayoutsthatitcanmaketoitsinvestors.Inaperfectcapitalmarket,thetypeofpayoutisirrelevant.Inreality,capitalmarketsarenotperfect,anditistheseimperfectionsthatshoulddeterminethefirm’spayoutpolicy.17.3TheTaxDisadvantageofDividends

(1of2)TaxesonDividendsandCapitalGainsShareholdersmustpaytaxesonthedividendstheyreceive,andtheymustalsopaycapitalgainstaxeswhentheyselltheirshares.Dividendsaretypicallytaxedatahigherratethancapitalgains.Infact,long-terminvestorscandeferthecapitalgainstaxforeverbynotselling.Table17.2Long-TermCapitalGainsVersusDividendTaxRatesintheUnitedStates,1971–2018YearCapitalGainsDividends1971–197835%70%1979–198128%70%1982–198620%50%198728%39%1988–199028%28%1991–199228%31%1993–199628%40%1997–200020%40%2001–200220%39%2003–201215%15%2013*–20%20%*Ratesshowncorrespondtothehigheststatutoryfederaltaxratesforassetsheldformorethanoneyear.Someinvestorsmayalsobesubjecttoanadditionalnetinvestmentincometaxof3.8%.Forassetsheldoneyearorless,capitalgainsaretaxedattheordinaryincometaxrate(currently37%forthehighestbracket);thesameistruefordividendsiftheassetsareheldforlessthan61days.Becausethecapitalgainstaxisnotpaiduntiltheassetissold,forassetsheldforlongerthanoneyeartheeffectivecapitalgainstaxrateisequaltothepresentvalueoftherateshown,whendiscountedbytheafter-taxrisk-freeinterestratefortheadditionalnumberofyearstheassetisheld.17.3TheTaxDisadvantageofDividends

(2of2)TaxesonDividendsandCapitalGainsThehighertaxrateondividendsmakesitundesirableforafirmtoraisefundstopayadividend.Whendividendsaretaxedatahigherratethancapitalgains,ifafirmraisesmoneybyissuingsharesandthengivesthatmoneybacktoshareholdersasadividend,shareholdersarehurtbecausetheywillreceivelessthantheirinitialinvestment.TextbookExample17.2(1of2)IssuingEquitytoPayaDividendProblemSupposeafirmraises$10millionfromshareholdersandusesthiscashtopaythem$10millionindividends.Ifthedividendistaxedata40%rate,andifcapitalgainsaretaxedata15%rate,howmuchwillshareholdersreceiveaftertaxes?TextbookExample17.2(2of2)SolutionShareholderswillowe40%of$10million,or$4millionindividendstaxes.Becausethevalueofthefirmwillfallwhenthedividendispaid,shareholders’capitalgainonthestockwillbe$10millionlesswhentheysell,loweringtheircapitalgainstaxesby15%of$10millionor$1.5million.Thus,intotal,shareholderswillpaymillionintaxes,andtheywillreceivebackonly$7.5millionoftheir$10millioninvestment.AlternativeExample17.2(1of3)ProblemAssumeAfirmraises$25millionfromshareholdersandusesthiscashtopaythem$25millionindividends.Dividendsaretaxedata39%taxrate.Capitalgainsaretaxedata20%taxrate.Howmuchwillshareholdersreceiveaftertaxes?AlternativeExample17.2(2of3)SolutionOndividends,shareholderswillowe

millionindividendtaxes.

Shareholderswilllowertheircapitalgainstaxesby

Note:Thevalueofthefirmwillfallwhenthedividendispaid,loweringtheshareholders’capitalgains.AlternativeExample17.2(3of3)SolutionShareholderswillpayatotalof$4.75millionintaxes.

Shareholderswillreceivebackonly$20.25millionoftheir$25millioninvestment.

OptimalDividendPolicywithTaxes

(1of3)Whenthetaxrateondividendsisgreaterthanthetaxrateoncapitalgains,shareholderswillpaylowertaxesifafirmusessharerepurchasesratherthandividends.Thistaxsavingswillincreasethevalueofafirmthatusessharerepurchasesratherthandividends.OptimalDividendPolicywithTaxes

(2of3)Theoptimaldividendpolicywhenthedividendtaxrateexceedsthecapitalgaintaxrateistopaynodividendsatall.Thepaymentofdividendshasdeclinedonaverageoverthelast30yearswhiletheuseofrepurchaseshasincreased.Figure17.4TrendsintheUseofDividendsandRepurchasesSource:Compustat.Figure17.5TheChangingCompositionofShareholderPayoutsSource:CompustatdataforU.S.firms,excludingfinancialfirmsandutilities.OptimalDividendPolicywithTaxes

(3of3)DividendPuzzleWhenfirmscontinuetoissuedividendsdespitetheirtaxdisadvantage17.4DividendCaptureandTaxClientelesThepreferenceforsharerepurchasesratherthandividendsdependsonthedifferencebetweenthedividendtaxrateandthecapitalgainstaxrate.Taxratesvarybyincome,byjurisdiction,andbywhetherthestockisheldinaretirementaccount.Giventhesedifferences,firmsmayattractdifferentgroupsofinvestorsdependingontheirdividendpolicy.TheEffectiveDividendTaxRate(1of2)Considerbuyingastockjustbeforeitgoesex-dividendandsellingthestockjustafterTheequilibriumconditionmustbe

Whichcanbestatedas

Whereisthecum-dividendprice,istheex-dividendprice,isthecapitalgainsratetax,andisthedividendtaxrateTheEffectiveDividendTaxRate(2of2)Thus,theeffectivedividendtaxrateisThismeasurestheadditionaltaxpaidbytheinvestorperdollarofafter-taxcapitalgainsincomethatisreceivedasadividend.TextbookExample17.3(1of2)ChangesintheEffectiveDividendTaxRateProblemConsideranindividualinvestorinthehighestU.S.taxbracketwhoplanstoholdastockformorethanoneyear.Whatwastheeffectivedividendtaxrateforthisinvestorin2002?Howdidtheeffectivedividendtaxratechangein2003?(Ignorestatetaxes.)TextbookExample17.3(2of2)SolutionFromTable17.2,in2002wehaveThisindicatesasignificanttaxdisadvantageofdividends;each$1ofdividendsisworthonly$0.7625incapitalgains.However,afterthe2003taxcut,Therefore,the2003taxcuteliminatedthetaxdisadvantageofdividendsforaone-yearinvestor.AlternativeExample17.3(1of2)ChangesintheEffectiveDividendTaxRateProblemConsideranindividualinvestorinthehighestU.S.taxbracketwhoplanstoholdastockformorethanoneyear.Whatwastheeffectivedividendtaxrateforthisinvestortoday?(Ignorestatetaxes.)AlternativeExample17.3(2of2)SolutionFromTable17.2,in2013topresentwehaveThisverifiesthatwhenthetaxratesoncapitalgainsanddividendsarethesame,dividendsdonotsufferataxdisadvantagerelativetocapitalgains.TaxDifferencesAcrossInvestorsTheeffectivedividendtaxratediffersacrossinvestorsforavarietyofreasons.IncomeLevelInvestmentHorizonTaxJurisdictionTypeofInvestororInvestmentAccountAsaresultoftheirdifferenttaxrates,investorswillhavevaryingpreferencesregardingdividends.ClienteleEffects(1of2)ClienteleEffectWhenthedividendpolicyofafirmreflectsthetaxpreferenceofitsinvestorclienteleIndividualsinthehighesttaxbracketshaveapreferenceforstocksthatpaynoorlowdividends,whereastax-freeinvestorsandcorporationshaveapreferenceforstockswithhighdividends.Table17.3DifferingDividendPolicyPreferencesAcrossInvestorGroupsInvestorGroupDividendPolicyPreferenceProportionofInvestorsIndividualinvestorsTaxdisadvantagefordividendsgenerallyprefersharerepurchase(exceptforretirementaccounts)approximately52%Institutions,pensionfundsNotaxpreferencepreferdividendpolicythatmatchesincomeneedsapproximately47%CorporationsTaxadvantagefordividendsapproximately1%Source:ProportionsbasedonFederalReserveFlowofFundsAccounts.ClienteleEffects(2of2)Dividend-CaptureTheoryThetheorythatabsenttransactioncosts,investorscantradesharesatthetimeofthedividendsothatnon-taxedinvestorsreceivethedividend.Animplicationofthistheoryisthatweshouldseelargetradingvolumeinastockaroundtheex-dividendday,ashigh-taxinvestorssellandlow-taxinvestorsbuythestockinanticipationofthedividend,andthenreversethosetradesjustaftertheex-dividenddate.Figure17.6VolumeandSharePriceEffectsofValueLine’sSpecialDividend17.5PayoutVersusRetentionofCashInperfectcapitalmarkets,onceafirmhastakenallpositive-NPVinvestments,itisindifferentbetweensavingexcesscashandpayingitoutWithmarketimperfections,thereisatradeoff:Retainingcashcanreducethecostsofraisingcapitalinthefuture,butitcanalsoincreasetaxesandagencycostsRetainingCashwithPerfectCapitalMarkets(1of3)Ifafirmhasalreadytakenallpositive-NPVprojects,anyadditionalprojectsittakesonarezeroornegative-NPVinvestments.Ratherthanwasteexcesscashonnegative-NPVprojects,afirmcanusethecashtopurchasefinancialassets.Inperfectcapitalmarkets,buyingandsellingsecuritiesisazero-NPVtransaction,soitshouldnotaffectfirmvalue.RetainingCashwithPerfectCapitalMarkets(2of3)Thus,withperfectcapitalmarkets,theretentionversuspayoutdecisionisirrelevant.TextbookExample17.4(1of2)DelayingDividendswithPerfectMarketsProblemBarstonMininghas$100,000inexcesscash.Barstonisconsideringinvestingthecashinone-yearTreasurybillspaying6%interest,andthenusingthecashtopayadividendnextyear.Alternatively,thefirmcanpayadividendimmediatelyandshareholderscaninvestthecashontheirown.Inaperfectcapitalmarket,whichoptionwillshareholdersprefer?TextbookExample17.4(2of2)SolutionIfBarstonpaysanimmediatedividend,theshareholdersreceive$100,000today.IfBarstonretainsthecash,attheendofoneyearthecompanywillbeabletopayadividendofThispayoffisthesameasifshareholdershadinvestedthe$100,000inTreasurybillsthemselves.Inotherwords,thepresentvalueofthisfuturedividendisexactlyThus,shareholdersareindifferentaboutwhetherthefirmpaysthedividendimmediatelyorretainsthecash.AlternativeExample17.4(1of4)ProblemPayneEnterpriseshas$20,000,000inexcesscash.Payneisconsideringinvestingthecashinone-yearTreasurybillpaying5%interestandthenusingthecashtopayadividendnextyear.AlternativeExample17.4(2of4)ProblemAlternatively,thefirmcanpayadividendimmediately,andshareholderscaninvestthecashontheirown.Inaperfectcapitalmarket,whichoptionwillshareholdersprefer?AlternativeExample17.4(3of4)SolutionIfPaynepaysanimmediatedividend,theshareholdersreceive$20,000,000today.IfPayneretainsthecash,attheendofoneyearthecompanywillbeabletopayadividendof$21,000,000.

AlternativeExample17.4(4of4)SolutionIfshareholdersinvestthe$20,000,000inTreasurybillsthemselves,theywouldhave$21,000,000attheendofoneyear.

Thepresentvalueineitherscenariois

Thusshareholdersareindifferentaboutwhetherthefirmpaysthedividendimmediatelyorretainsthecash.RetainingCashwithPerfectCapitalMarkets(3of3)MMPayoutIrrelevanceInperfectcapitalmarkets,ifafirminvestsexcesscashflowsinfinancialsecurities,thefirm’schoiceofpayoutversusretentionisirrelevantanddoesnotaffecttheinitialshareprice.TaxesandCashRetentionCorporatetaxesmakeitcostlyforafirmtoretainexcesscash.Cashisequivalenttonegativeleverage,sothetaxadvantageofleverageimpliesataxdisadvantagetoholdingcash.TextbookExample17.5(1of2)RetainingCashwithCorporateTaxesProblemSupposeBarstonmustpaycorporatetaxesata35%rateontheinterestitwillearnfromtheone-yearTreasurybillpaying6%interest.Wouldpensionfundinvestors(whodonotpaytaxesontheirinvestmentincome)preferthatBarstonuseitsexcesscashtopaythe$100,000dividendimmediatelyorretainthecashforoneyear?TextbookExample17.5(2of2)SolutionIfBarstonpaysanimmediatedividend,shareholdersreceive$100,000today.Ifbarstonretainsthecashforoneyear,itwillearnanafter-taxreturnontheTreasurybillsofThus,attheendoftheyear,BarstonwillpayadividendofThisamountislessthanthe$106,000theinvestorswouldhaveearnediftheyhadinvestedthe$100,000inTreasurybillsthemselves.Becausebarstonmustpaycorporatetaxesontheinterestinearns,thereisataxdisadvantagetoretainingcash.PensinfundinvestorswillthereforepreferthatBarstonpaysthedividendnow.AlternativeExample17.5(1of2)ProblemWhatifPayne,fromAlternativeExample17.4,hasamarginaltaxrateof39%.Wouldatax-exemptendowmentpreferthatPayneuseitsexcesscashtopaythedividendimmediatelyorinvestthecashinaTreasurybillpaying5%interestandthenpayoutadividend?AlternativeExample17.5(2of2)SolutionIfPaynepaysadividendtoday,shareholdersreceive$20,000,000.IfPayneretainsthecashforoneyear,itwillearnanafter-taxreturnontheTreasurybillsofAttheendoftheyear,PaynewillpayadividendofThisamountislessthanthe$21,000,000theendowmentwouldhaveearnediftheyhadinvestedthe$20,000,000intheTreasurybillsthemselves.TextbookExample17.6(1of2)Microsoft’sSpecialDividendProblemIntheintroductiontothischapter,wedescribedMicrosoft’sspecialdividendof$3pershare,or$32billion,duringlate2004.IfMicrosofthadinsteadretainedthatcashpermanently,whatwouldthepresentvalueoftheadditionaltaxesbe?TextbookExample17.6(2of2)SolutionIfMicrosoftretainedthecash,theinterestearnedonitwouldbesubjecttoa35%corporatetaxrate.Becausetheinterestpaymentsareriskfree,wecandiscountthetaxpaymentsattherisk-freeinterestrate(assumingMicrosoft’smarginalcorporatetaxratewillremainconstantorthatchangestoithaveabetaofzero).Thus,thepresentvalueofthetaxpaymentsonMicrosoft’sadditionalinterestincomewouldbeEquivalently,onapersharebasis,Microsoft’staxsavingsfrompayingoutthecashratherthanretainingitispershare.AlternativeExample17.6(1of2)ProblemWhatifPayne,fromAlternativeExamples17.4and17.5,weretopayaspecialdividendof$20,000,000.HowwouldthisaffectthepresentvalueofthetaxesPaynemustpay?AlternativeExample17.6(2of2)SolutionIfPayneretainsthe$20,000,000andinvestsinTreasuryBills,theinterestwillbetaxedat39%.ThepresentvalueofthetaxpaymentsonPayne’sadditionalinterestincomewillbeAdjustingforInvestorTaxes(1of2)Thedecisiontopayoutversusretaincashmayalsoaffectthetaxespaidbyshareholders.Whenafirmretainscash,itmustpaycorporatetaxontheinterestitearns.Inaddition,theinvestorwillowecapitalgainstaxontheincreasedvalueofthefirm.Inessence,theinterestonretainedcashistaxedtwice.AdjustingforInvestorTaxes(2of2)Ifthefirmpaidthecashtoitsshareholdersinstead,theycouldinvestitandbetaxedonlyonceontheinterestthattheyearn.Thecostofretainingcashthereforedependsonthecombinedeffectofthecorporateandcapitalgainstaxes,comparedtothesingletaxoninterestincome.IssuanceandDistressCosts(1of2)Generally,firmsretaincashbalancestocoverpotentialfuturecashshortfalls,despitethetaxdisadvantagetoretainingcash.Afirmmightaccumulatealargecashbalanceifthereisareasonablechancethatfutureearningswillbeinsufficienttofundfuturepositive-N

P

Vinvestmentopportunities.IssuanceandDistressCosts(2of2)Thecostofholdingcashtocoverfuturepotentialcashneedsshouldbecomparedtothereductionintransaction,agency,andadverseselectioncostsofraisingnewcapitalthroughnewdebtorequityissues.AgencyCostsofRetainingCash(1of2)Whenfirmshaveexcessivecash,managersmayusethefundsinefficientlybypayingexcessiveexecutiveperks,over-payingforacquisitions,etc.Payingoutexcesscashthroughdividendsorsharerepurchases,ratherthanretainingcash,canboostthestockpricebyreducingmanagers’abilityandtemptationtowasteresources.TextbookExample17.7(1of3)CuttingNegative-NPVGrowthProblemRextonOilisanall-equityfirmwith100millionsharesoutstanding.Rextonhas$150millionincashandexpectsfuturefreecashflowsof$65millionperyear.Managementplanstousethecashtoexpandthefirm’soperat