财务管理专业英语

1.1FinancialManagementandFinancialManager1.2FinancialManagementDecision1.3Risk–ReturnTradeoffFinancialManagementandFinancialManagerFinancialmanagementisanintegrateddecision-makingprocessconcernedwithacquiring,financing,andmanagingassetstoaccomplishsomeoverallgoalwithinabusinessentity.

managerialfinancecorporatefinancebusinessfinanceCEO-

chiefexecutiveofficer

CFO-chieffinancialofficer

FinancialManagementDecisionLong-terminvestmentdecisions

Long-termfinancingdecisions

WorkingCapitalManagementDecisions

FinancialManagementDecisionLong-terminvestmentdecisions

Inwhatlinesofbusinessshouldthefirmengage?Shouldthefirmacquireothercompanies?Whatsortsofproperty,plant,andequipmentshouldthefirmhold?Shouldthefirmmodernizeorsellanoldproductionfacility?Shouldthefirmintroduceamoreefficientdistributionsystemthanthecurrentone?

FinancialManagementDecisionLong-termfinancingdecisions

Doesthetypeoffinancingusedmakeadifference?Istheexistingcapitalstructuretherightone?Howandwhereshouldthefirmraisemoney?Shouldthefirmusefundsraisedthroughitsrevenues?Shouldthefirmraisemoneyfromoutsidethebusiness?Ifthefirmseeksexternalfinancing,shoulditbringinotherownersorborrowthemoney?

FinancialManagementDecisionWorkingCapitalManagementDecisions

Howmuchofafirm’stotalassetsshouldthefirmholdineachtypeofcurrentassetsuchascash,marketablesecurities,andinventory?Howmuchcreditshouldthefirmgranttocustomers?Howshouldthefirmobtainneededshort-termfinancing?

FinancialManagementDecisionRisk–ReturnTradeoffriskaversion——investorsshouldexpectahigherreturnfortakingonhigherlevelsofrisk

2.1TypesofBusinessOrganization2.2CorporateStructureoftheCompany2.3ObjectivesofFinancialManagement2.4SeparationofOwnershipandControl2.5AgencyRelationshipsTypesofBusinessOrganizationSoleProprietorshipanunincorporatedbusinessownedbyoneperson

Partnershipownedbytwoormoreindividuals(calledpartners) Limitedpartnership——generalpartners limitedpartners

Corporationalegalentityseparatefromitsowners

CorporateStructureoftheCompanyObjectivesofFinancialManagementStakeholderTheorymanagersshouldmakedecisionsthattakeintoaccounttheinterestsofallofafirm’sstakeholdersValueorWealthMaximizationtomaximizelong-termfirmvalueorwealthSeparationofOwnershipandControlTheentitywhichownsthecompany(shareholders)isoftennottheonethatcontrolsthecompany’sresources(management)SeparationofOwnershipandControlTheentitywhichownsthecompany(shareholders)isoftennottheonethatcontrolsthecompany’sresources(management)SeparationofOwnershipandControlFourmajordownsidesagencyproblemfree-ridingproblemincreasedcostsofinformationgathering.informationasymmetryAgencyRelationshipsAgencyproblem

Managersmaywastecorporatecashandresourcesbyengaginginnegativenetpresentvalue(NPV)acquisitionsorinvestmentstosatisfytheirdesiretobuildanempire.Lessominous,butnolesscostly,managersmaysquandercorporatefundsonexcessivelylavishcorporateofficesandjets.Morerecentlymanagershavebeenknowntoincreaseshareprices(notvalue)byusing“creativeaccounting”,soastoexercisetheirstockoptions(e.g.Enron).AgencyRelationshipsAgencycostsarethetotalcostsresultingfromtheagencyproblem.

managementtakesactionsthatnegativelyinfluencethewealthofshareholders,orwhen.

theshareholdersmonitorthemanagement’sactionstoensurecompliance.AsdefinedbyJensenandMeckling(1976),agencycostscomprisethefollowing:

Bondingcosts

Monitoringcosts

ResidualcostsAgencyRelationshipsAgencycostsarethetotalcostsresultingfromtheagencyproblem.

managementtakesactionsthatnegativelyinfluencethewealthofshareholders,orwhen.

theshareholdersmonitorthemanagement’sactionstoensurecompliance.AsdefinedbyJensenandMeckling(1976),agencycostscomprisethefollowing:

Bondingcosts

Monitoringcosts

ResidualcostsAgencyRelationshipsPracticalsolutionstotheagencyproblem——ensurethat

managerialactionsareconsistentwithshareholders’interests.

Equity-basedmanagerialcompensationschemesElectionofindependentoutsidememberstotheboardofdirectorsThreatofdismissalofmanagement.Asalastresort,thethreatofahostiletakeover.3.1BasicsofAnnualReportsandFinancialStatements3.2BalanceSheet3.3IncomeStatement3.4StatementofRetainedEarnings3.5StatementofCashFlowBasicsofAnnualReportsandFinancialStatementsCorporateAnnualReports

OverviewofFinancialStatements

balancesheet;

incomestatement;

statementofcashflows;

statementofretainedearnings.BalanceSheetAnaccountant’ssnapshotofthefirm’saccountingvalueonaparticulardateAssets

Liabilities

Owners’equityBalanceSheetBalanceSheetHistoricalCostCurrentMarketValueIncomeStatementAstatementofearningsoraprofitandlossstatementRevenue

Expenses

Income

IncomeStatementIncomeStatementNetIncomeversusCashFlow

AccrualaccountingDepreciationTaxes

StatementofRetainedEarnings

theretainedearningsbalanceatthestartoftheperiod;

howmuchthefirmearned(netincome);

howmuchdividendsthefirmpaid;

howmuchnetincomewasreinvestedbackintothefirm(retainedearnings);

anyrepurchasesofthefirm’sstock;

anynewissuesofthefirm’sstock;and

theretainedearningsbalanceatthecloseoftheperiod.

StatementofRetainedEarningsStatementofCashFlowOperatingCashFlows

InvestingCashFlowsFinancingCashFlows

StatementofCashFlow

4.1FinancialRatioAnalysis4.2LiquidityRatios4.3DebtManagementRatios4.4AssetManagementRatios4.5ProfitabilityRatios4.6MarketValueRatios4.7UsesandLimitationsofFinancialRatioAnalysisFinancialRatioAnalysisAfinancialratioisamathematicalrelationshipamongseveralnumbersoftenstatedintheformofpercentage,times,ordays.

AnalyzingFinancialRatiosFinancialratiosarenotstandardized.Analyzingasinglefinancialratioforagivenyearmaynotbeveryuseful.Someofafirm’sfinancialaccountingpracticesorchoiceswillaffectitsfinancialstatementsand,finally,itsfinancialratios.Financialratiosdonotprovideanalystswithalloftheanswersaboutafirm’scondition.LiquidityRatiosLiquidityratiosindicateafirm’sabilitytopayitsobligationsintheshortrun.CurrentratioLiquidityRatiosQuickratioCashratio

DebtManagementRatios

Debtmanagementratioscharacterizeafirmintermsoftherelativemixofdebtandequityfinancingandprovidemeasuresofthelong-termdebtpayingabilityofthefirm.Debtratio

Debt

to

equityratio

Equitymultiplier

DebtManagementRatios

Debtmanagementratioscharacterizeafirmintermsoftherelativemixofdebtandequityfinancingandprovidemeasuresofthelong-termdebtpayingabilityofthefirm.Debtratio

Debt

to

equityratio

Equitymultiplier

DebtManagementRatiosLong-termDebtRatioInterestCoverageRatioDebtManagementRatiosCashFlowCoverageRatioAssetManagementRatiosAssetmanagementratios,alsoreferredtoasassetutilizationorassetefficiencyratios,measureafirm’sabilitytomanagetheassetsatitsdisposal.AccountsReceivableTurnoverRatioAssetManagementRatiosInventoryTurnoverRatioAccountsPayableTurnoverRatioAssetManagementRatiosAssetTurnoverRatiosProfitabilityRatios

Profitabilityratiomeasurestheearningpowerofafirm.GrossProfitMarginProfitabilityRatiosOperatingProfitMarginNetProfitMarginProfitabilityRatiosReturnonAssetsTotalReturnonAssetsProfitabilityRatiosReturnonTotalEquityReturnonCommonEquityProfitabilityRatiosDuPontAnalysisofROEMarketValueRatiosPrice/earningsRatioMarket-to-bookValueRatioMarketValueRatiosDividendYieldDividendPayoutUsesandLimitationsofFinancialRatioAnalysiswhileratioanalysiscanprovideusefulinformationconcerningacompany’soperationsandfinancialcondition,itdoeshavelimitationsthatnecessitatecareandjudgment.5.1CentralConceptsinFinancialManagement5.2Simplevs.CompoundInterestRatesandFuturevs.PresentValue5.3Annuity5.4ValuationFundamentals5.5BondValuation5.6CommonStockValuationCentralConceptsinFinancialManagementRisk-returntradeoff

Investorswilltakeonadditionalriskonlyiftheyanticipatehighreturn.TimevalueofmoneyAdollaravailabletodayisworthmorethanadollaravailableatafuturedate.Thisisbecauseadollartodaycanbeinvestedtoearnareturn.Simplevs.CompoundInterestRatesandFuturevs.PresentValueSimpleinterest

Simplevs.CompoundInterestRatesandFuturevs.PresentValueCompoundinterestSimplevs.CompoundInterestRatesandFuturevs.PresentValueFutureValuePresentValue

discountrate——opportunitycost,requiredrateofreturn,andthecostofcapital.

Annuity

Ordinaryannuity——thefirstcashflowintheseriesisoneperiodfromtoday.Thisisthemostcommonformofannuity.

Annuitydue——thefirstcashflowintheseriesoccursatthebeginningofeachperiod.

Deferredannuity——thefirstcashflowintheseriesoccursbeyondoneperiodfromtoday.

Perpetuity——theseriesofpaymentscontinuesindefinitely.Annuity

Ordinaryannuity——thefirstcashflowintheseriesisoneperiodfromtoday.Thisisthemostcommonformofannuity.

Annuitydue——thefirstcashflowintheseriesoccursatthebeginningofeachperiod.

Deferredannuity——thefirstcashflowintheseriesoccursbeyondoneperiodfromtoday.

Perpetuity——theseriesofpaymentscontinuesindefinitely.Annuity

OrdinaryannuityAnnuityPerpetuityAnnuityNominalandeffectiveinterestratesValuationFundamentalsTypesofvalueGoing-concernvalueLiquidationvalueBookvalueMarketvalueIntrinsicvalueValuationFundamentalsValuationApproachesdiscountedcashflow(DCF)valuationrelativevaluationcontingentclaimvaluationoption-pricingmodelsValuationFundamentalsDiscountedCashFlowValuationBondValuationContractualProvisionsofaTypicalBondParValueCouponandCouponRateMaturityCallProvisionsSinkingFundProvisionsConversionRightsPutProvisionsIndentureTrusteeCollateralBondRatingBondValuationTheBondValuationFormulaBondValuationBondPricesandReturnsCurrentYieldYieldtoMaturity——return-to-maturity(RTM)；internalrateofreturn(IRR)CommonStockValuationCommonStockCharacteristicsandFeaturesParorNoParStockAuthorized,Issued,Outstanding,andTreasurySharesRighttoVoteRighttoIncomeRighttoResidualAssetsRighttoTransferOwnershipCommonStockValuationDividendDiscountModelsConstantGrowthModel6.1IntroductiontoRiskandReturn6.2EfficientMarketHypothesis(EMH)6.3PortfolioTheory6.4BetaandCapitalAssetPricingModel6.5ArbitragePricingTheoryIntroductiontoRiskandReturn1.Allfinancialassetsareexpectedtoproducecashflows,andtheriskofanassetisjudgedbytheriskofitscashflows.2.Herearetwoassumptionsaboutriskandreturn:Assumption(1):Thereturnsfrominvestmentsarenormallydistributed.Assumption(2):Investorsarerisk-averse.3.Theriskofanassetcanbeconsideredintwoways:(1)ona

stand-alonebasis

(2)inaportfoliocontext4.Inaportfoliocontext,anasset’sriskcanbedividedintotwocomponents:(1)diversifiablerisk

(2)marketrisk5.Anassetwithahighdegreeofrelevant(market)riskmustprovidearelativelyhighexpectedrateofreturntoattractinvestors.IntroductiontoRiskandReturnWhatisReturn?Expectedreturnreferstotheexpectedchangeinthevalueofanassetoveragiven(future)timeperiod.WhatisRisk?riskisusuallyestimatedwiththestandarddeviation,whichisthesquarerootofthevarianceofreturns.IntroductiontoRiskandReturnUncertaintysensitivityanalysisscenarioanalysis

Probability

Normaldistribution

EfficientMarketHypothesis(EMH)Assumption1:Thereturnsfrominvestmentsarenormallydistributed.Assumption2:Investorsarerisk-averse.Assumption3:Investorsarerational.Assumption4:Investorsarepricetakers.Assumption5:TheEfficientMarketHypothesis(EMH)holds.EfficientMarketHypothesis(EMH)EfficientmarkethypothesisPricesfullyreflectallavailableinformationonaparticularstockand/ormarket.Noinvestorhasanadvantageinpredictingareturnonastockpricesincenoonehasaccesstoinformationnotalreadyavailabletoeveryoneelse.Financialmarketefficiency

Threetypesoffinancialmarketefficiency:

allocationallyefficient

operationallyefficient

informationallyefficientFinancialmarketefficiency

ThreemainfactorsassociatedwithinformationalmarketefficiencyThetypeofinformationtowhichthemarketpricereactsThespeedatwhichthemarketpricereactstoinformationThedegreetowhichmarketparticipantsover-orunder-reacttoinformationFinancialmarketefficiencyFormsofInformationalEfficiencyFama(1970)distinguishesthreeformsofinformationallyefficientmarkets:WeakFormSemi-strongFormStrongFormFinancialmarketefficiencyCharacteristicsofanInformationallyEfficientMarketPricechangescannotbepredicted.Thepriceoftheassetisequaltoitsfundamental(unobservedbuttrue)value.Priceschangeduetotheinflowofnewinformation,andinformationflowsrandomlytothemarket.Therefore,pricechangesshouldberandomandunpredictable.FinancialmarketefficiencyAnomaliesinFinancetheshort-rununderpricingofInitialPublicOfferings(IPOs)smallcompanieshavehigherreturnsthanthatexpected,basedontheCAPM(smallfirmeffect)onaverage,stockshavelower(negative)returnsonMonday,comparedto(positive)returnsonotherdaysoftheweek(Mondayeffect)stockshavehigherreturnsinJanuary,relativetoothermonthsoftheyear(Januaryeffect).longrunreversionsinreturns(overreaction)——

buylosers,sellwinners;post-earningsannouncementdriftPortfolioTheoryHarryM.Markowitz(1952)TheExpectedReturnofaPortfolio——aweightedaverageoftheexpectedreturnsontheindividualsecuritiesRiskinaPortfolioContextVarianceandstandarddeviationmeasurethevariabilityofindividualstocks.Covarianceandcorrelationmeasurehowtworandomvariablesarerelated.PortfolioTheoryModernportfoliotheory—Markowitz’sMean-varianceFrameworkEfficientportfoliosarethosethathave:

thelowestriskforanexpectedrateofreturn;or

thehighestexpectedrateofreturnforagivenlevelofrisk.Theassetsthatmeetthesecriteriamakeuptheefficientfrontier.PortfolioTheoryDiversifiedRiskversusMarketRiskBetaandCapitalAssetPricingModelTheConceptofBetaBetacoefficient,isdefinedundertheCAPMastheamountofriskthatthestockcontributestothemarketportfolio.β

0.5:Stockisonlyhalfasriskyasthemarket,ifheldinadiversifiedportfolio.β

1.0:Stockisaboutasriskyasthemarket,ifheldinadiversifiedportfolio.β

2.0:Stockistwiceasriskyasthemarket,ifheldinadiversifiedportfolio.BetaandCapitalAssetPricingModelThecapitalassetpricingmodel(CAPM)measurestherelationshipbetweenriskandrequiredrateofreturnforassetsheldinwell-diversifiedportfolios.ArbitragePricingTheoryStephenRossproposedanapproachcalledtheArbitragePricingTheory(APT)whichcanincludeanynumberofriskfactors,sotherequiredreturncouldbeafunctionoftwo,three,four,ormorefactors.7.1CapitalInvestmentdecisions7.2GuidelinesforEstimatingProjectCashFlows7.3InvestmentRules7.4BusinessPractice7.5AnalyzingProjectRisk7.6ProjectSelectionwithResourceConstrains7.7QualitativeFactorsandtheSelectionofProjects7.8ThePost-AuditCapitalInvestmentdecisionsProjectClassificationsExpansionProjectsvs.ReplacementProjectsIndependentProjectsvs.MutuallyExclusiveProjects

GuidelinesforEstimatingProjectCashFlowsIdentifyIncrementalCashFlowsFocusonAfter-taxCashFlowsPostponeConsideringFinancingCostsOtherCashFlowConsiderations SunkCosts OpportunityCosts AllocatedOverhead ResidualValue SideEffects

InvestmentRules

NetPresentValue(NPV)ProfitabilityIndex(PI)InternalRateofReturn(IRR)PaybackPeriod(PP)DiscountedPaybackPeriod(DPP)BusinessPractice

Findingsofa1993surveybyFortune5001.EveryrespondingfirmusedsometypeofDCFmethod.In1955,asimilarstudyreportedthatonly4percentoflargecompaniesusedaDCFmethod.Thus,largefirms’usageofDCFmethodologyincreaseddramaticallyinthelasthalfofthe20thcentury.2.Thepaybackperiodwasusedby84percentofBierman’ssurveyedcompanies.However,nocompanyuseditastheprimarymethod,andmostcompaniesgavethegreatestweighttoaDCFmethod.In1955,surveyssimilartoBierman’sfoundthatpaybackwasthemostimportantmethod.3.In1993,99percentoftheFortune500companiesusedIRR,while85percentusedNPV.Thus,mostfirmsactuallyusedbothmethods.4.AnexaminationofsurveysdonebyotherauthorsledBiermantoconcludethattherehasbeenastrongtrendtowardtheacceptanceofacademicrecommendations,atleastbylargecompanies.BusinessPractice

Asecond1993study,conductedbyJoeWalker,RichardBurns,andChadDenson(WBD),focusedonsmallcompanies.AnalyzingProjectRisk

SensitivityAnalysis——Sensitivityanalysisinvolvesassessingtheeffectofchangesorerrorsintheestimatedvariablesonthenetpresentvalueofaproject.

Break-evenAnalysis——Break-evenanalysisisaformofsensitivityanalysis.Sensitivityanalysisgenerallyinvolvesfindinganswersto“whatif”questions.

Simulation——simulationallowsamanagertoconsidertheeffectsofchangingallthevariableswhosevaluesareuncertain.ProjectSelectionwithResourceConstrains

Capitalrationing

internal(or“soft”)capitalrationingexternal(or“hard”)capitalrationingQualitativeFactorsandtheSelectionofProjects

Qualitativefactorsarethosethatmanagementwouldliketoinduceinthequantitativeanalysisbutisunabletoincludebecausetheyaredifficult,ifnotimpossible,tomeasureindollars.Itisessentialthatsuchqualitativefactorsbeconsideredbeforeselectingaproject.

ThePost-Audit

Whatispost-audit?(1)comparingactualresultswiththosepredictedbytheproject’ssponsors;(2)explainingwhyanydifferencesoccurred.Twomainpurposesofthepost-audit:ImproveforecastsImproveoperations8.1FinancialMarkets

8.2InvestmentBanks8.3TheDecisiontoGoPublic8.4CostofCapitalConceptFinancialMarkets

TheRoleofFinancialMarkets:

1.Helpchannelfundsfromsupplierstodemanders.2.Providearesalemarket.3.Setmarketpricesandratesofreturn.FinancialMarkets

TypesofFinancialMarkets:

1.MoneyMarketsvs.CapitalMarkets2.PrimaryMarketsvs.Secondarymarkets3.PrivateMarketsvs.PublicMarketsInvestmentBanks

Threemajorservicesbyinvestmentbanks:

1.Advising2.Underwriting3.MarketingTheDecisiontoGoPublic

Privatelyheldcompanyvs.publiclyheldcompany

Initialpublicoffering(IPO)

۩unseasonednewissue

۩seasonedissueTheDecisiontoGoPublicAdvantagesofGoingPublic1.Broadenafirm’saccesstocapitalmarket;2.Increasetheliquidityofafirm’sstock.3.Setavalueforafirm’sshares.4.Increaseafirm’sabilitytoattractmanagement.TheDecisiontoGoPublicDisadvantagesofGoingPublic1.Dilutionofcontrol;2.Costs;3.Disclosureofoperatingdata;4.Possibleinactivetrading.DifferentmethodsofIssuingNewSecurities

Publicoffer——thesaleofanissueofsecuritiestothepublic

Cashoffer

Rightsoffer——alsocalledaprivilegedsubscription,involvesinitiallyofferingthesecuritiestothefirm’sexistingstockholders.

CostofCapitalConcept

“Costofcapital”or“Rateofrequiredreturn

”Thecostofcapitalistheratethatthefirmhastopay,explicitlyorimplicitly,theinvestorsfortheircapitalortheminimumrateofreturnrequiredbythesuppliersofcapital.

CostofCapitalConcept

UseoftheCostofCapitalintwomajorways:1.Tohelpidentifythediscountratetobeusedtoevaluateproposedcapitalinvestments;2.Toserveasaguidelineindevelopingcapitalstructureandevaluatingfinancialalternatives.UseCostofCapitalConcept

CapitalComponentsvarioustypesofdebtpreferredstockcommonsecurity

CostofCapitalConcept

Theweightedaveragecostofcapital(WACC)istheweightedaverageofthecostsofdebtandequity.Measuringacompany’sWACCinvolvestwomajorsteps:(1)estimatingthecostofeachcapitalcomponent;(2)determiningtheweightsofeachcomponent.MultiplyingeachcapitalcomponentbyitsweightinthecapitalstructureandthensummingthepercentagesproduceanestimateoftheWACC.9.1TheChoices:TypesofFinancing9.2TheFinancingMix9.3UnderstandingFinancialRisk9.4CapitalStructureandtheValueofaFirm9.5ChecklistforCapitalStructureDecisionsTheChoices:TypesofFinancingDebtorEquity?EquityOwner’sEquityVentureCapitalandPrivateEquityCommonStockWarrantsContingentValueRights

TheChoices:TypesofFinancingDebtorEquity?DebtBankdebtBondsLeasesTheChoices:TypesofFinancingDebtorEquity?HybridSecuritiesConvertibleBondPreferredStockTheFinancingMix

Thecapitalstructuredecisioninvolvesdeterminingafirm’sfinancingmix.Capitalstructureisthemixoflong-termsourcesoffundsusedbythefirm.UnderstandingFinancialRisk

Businessrisk——thevolatilityofoperatingincome,causedbythenatureofthefirm’sbusinessFinancialrisk——Whenfirmsborrow,theyincurfinancialrisk

Borrowingincreasestheriskofdefaultforafirm.Interestandprincipalpaymentsondebtarelegalobligationsforthefirm.Failuretomeetthesepaymentsinatimelymannermayleadtodefaultandeventualbankruptcyforthefirm.

Theinterestandprincipalpaymentsassociatedwithborrowingincreasethevolatilityofafirm’searningspershareanditsreturnonequity.CapitalStructureandtheValueofaFirm

TheModigliani-MillerTheorem

CapitalStructureandtheValueofaFirm

TheM&MTheoremintheRealWorld

DoestheM&Mtheoremholdintherealworld?Probablynot.Millerwasquotedlaterassaying:Theviewthatcapitalstructureisliterallyirrelevantorthat“nothingmatters”incorporatefinance,thoughsometimesattributedtous(andtracingperhapstotheveryprovocativewaywemadeourpoint),isfarfromwhatweeveractuallysaidabouttherealworldapplicationsofourtheoreticalpropositions.CapitalStructureandtheValueofaFirm

TheM&MTheoremintheRealWorld

TheModigliani-MillerTheoremwithCorporateTaxes——Thevalueofaleveredfirmisthevalueofanotherwiseidenticalunleveredfirmplusthevalueoftaxshield.

WhyFirmsAreNotLeveragedtotheMaximum——CostsofFinancialDistressandBankruptcyCapitalStructureandtheValueofaFirm

TradeoffTheoryofOptimalCapitalStructure

Thetaxbenefitsofdebtfinancingbestowedbythegovernmentandthecostsoffinancialdistressthatmayatsomepointaccompanytheuseoffinancialleveragemayleadtoastatictradeoffthatprovidesanoptimalcapitalstructureforafirm.CapitalStructureandtheValueofaFirm

PeckingOrderTheoryofCapitalStructure

1.Managerspreferinternalfinancingtoexternalfinancing.2.Whenoperatingcashflowsandresultingprofitsarehigherthanexpectedandinexcessofwhatthefirmneedstofundnewcapitalexpendituresandpaydividends,managerspayoffdebtorinvestinmarketablesecurities.Whentheyareless,managersdrawdowncashbalancesandsellmarketablesecuritiesinordertofundnewexpendituresandpaydividends.3.Afterdrawingdowncashbalancesandsellingmarketablesecurities,managersneedtoseekexternalfinancingfromtimetotime.4.Whenforcedtoraisefundsexternally,firmsprefertoissuedebtandseektoavoidissuingnewsharesofequity.ChecklistforCapitalStructureDecisions

SalesstabilityAssetstructureOperatingleverageGrowthrateProfitabilityTaxesControlManagementattitudesLenderandratingagencyattitudesMarketconditionsThefirm’sinternalconditionFinancialflexibility10.1DividendsandDividendPolicy10.2TheDividendPuzzle10.3FactorsInfluencingtheDividendDecision10.4DividendPolicies

10.5StockRepurchasesDividendsandDividendPolicy

DividendPayoutProcedure1.Declarationdate2.Ex-dividenddate3.Recorddate

4.Paymentdate

DividendsandDividendPolicy

TypesofDividends

CashDividendsStockDividendsPropertyDividendsTheDividendPuzzle

DividendIrrelevanceTheory

whatafirmpaysindividendsisirrelevantandthatstockholdersareindifferentaboutreceivingdividends.

TheDividendPuzzle

DividendRelevanceTheory

TheTax-preferenceExplanation——investorsexpecthigherpretaxreturnsfromdividend-payingstockbecauseofthefuturetaxliabilityondividends.TheSignalingExplanation——dividendpolicyconveysimportantinformationtothemarketaboutthequalityofacompany.TheAgencyExplanation——dividendmechanismprovidesanincentiveformanagerstoreducetheseagencycostsrelatedtotheprincipal/agentrelationship.Thatis,agencytheorymodelscontendthatdividendpolicymitigatesagencyconflictsbetweenmanagerialandstockholderpriorities.FactorsInfluencingtheDividendDecision

1.Shareholderfactors2.Firmfactors3.OtherconstraintsFactorsInfluencingtheDividendDecision

ShareholderfactorsIncomeNeedsRiskPreferencesTaxStatusDilutionofOwnershipFactorsInfluencingtheDividendDecision

FirmFactorsStageofLifeCycleExternalFinancingCostsAccesstoFundsandReservesProfitabilityandEarningStabilityDividendPolicies

ResidualDividendPolicy

StableDol