财务管理基础工业出版社13版Chap018-PPT

1、Dividend Policy and Retained Earnings,18,1-2,Chapter Outline,Decisions on use of firms annual earnings Dividends and the dividend policy Factors influencing the dividend policy Stock dividends and stock splits Repurchase of the firms shares,1-3,The Marginal Principle of Retained Earnings,Benefits to

2、 stockholders analyzed by comparing: Rate of return on retained earnings Earnings that may be generated by offering dividends Project financed by internally generated funds must provide a higher rate of return: Compared to what stockholders can achieve on other investments,1-4,Life Cycle Growth and

3、Dividends,1-5,Dividends as a Passive Variable,Dividends are paid out only if the corporation cannot make better use of the funds for the benefit of stockholders Active decision variable is the retained earnings Residual (after fulfilling internal corporate expenses) is paid to stockholders Cash divi

4、dends,1-6,An Incomplete Theory,Residual theory of earnings does not consider the stockholders opinion on dividends It is considered acceptable, if the stockholders only concern is achieving highest returns : Corporate retained earnings remaining in the business Paid out as current dividends If howev

5、er, the stockholder prefers one over the other option, then this theory is incomplete,1-7,Arguments for the Relevance of Dividends,Dividends resolve uncertainty in the minds of investors It can be hypothesized that stockholders might: Apply a higher discount rate (Ke), and Assign a lower valuation o

6、f funds that are retained in the business Because of the information content of dividends viewed more favorably than retained earnings to the stockholders Stockholders needs and preferences go beyond the marginal principle of retained funds,1-8,Arguments for the Relevance of Dividends (contd),In pra

7、ctice, it appears that most corporations adhere to the following logic: Investment opportunities relative to a required return (marginal analysis) are determined Then, it is tempered by subjective notion of stockholders desires For mature firms: An analysis of both investment opportunities and stock

8、holder preferences may indicate that a higher rate of payout is required,1-9,Corporate Dividend Policy,1-10,Dividend Stability,Maintenance of stability is a primary factor in considering stockholder desire in dividend policy Dollar amount of cash dividends tends to be more stable Increases in value

9、takes place when new permanent levels of income are achieved Management hopes to lower the discount rate (Ke), applied to future dividends, thus raising the value of the firm,1-11,Corporate Profits and Dividends for Non-Financial Firms,1-12,Legal Rules,Most states forbid payment of dividends that mi

10、ght impair the initial capital contributions to the firm They may thus be distributed only from past and current earnings Aim is to protect creditors If the firm chooses to pay dividends equal to the retained earnings, the operation of the firm may be jeopardized,1-13,Raiding the Capital,Assume a co

11、mpany has the following statement of net worth, the maximum dividend payment would be $20 million Common stock (1 million Shares at $10 par value)*.$10,000,000 Retained earnings. $20,000,000 Net worth $30,000,000 * If there is a paid-in capital in excess of par account, some states will allow additi

12、onal dividend payment while others will not. To simplify the problem now, paid-in capital in excess of par is not considered.,1-14,Cash Position of the Firm,There are limitations to the use of current earnings as an indicator of liquidity A growth firm producing the greatest gains in earnings may be

13、 in the poorest cash position There is a buildup in receivables and inventory, with a rapid expansion in sales and earnings This may far exceed cash flow generated through earnings,1-15,Access to Capital Markets,A medium-to-large size company having relatively easy access to financial markets may be

14、 willing to pay dividends It can sell new common stock or bonds in the future if and when funds are necessary Some may issue debt or stock and use part of the proceeds to guarantee the maintenance of current dividends Justifying this action on the basis of maintaining stable dividends,1-16,Desire fo

15、r Control,Directors and officers of a small, closely held firms may hold back paying dividends To avoid diluting the cash position Larger firms face a different kind of threat: Stockholders, in light of previously offered healthy dividends, may demand the removal of management if dividends are withh

16、eld for any reason,1-17,Tax Position of Shareholders,Jobs and Growth Tax Relief Act of 2003 Dividends and long-term capital gains only, for high income tax payers, are taxed up to a maximum of 15% Short-term capital gains are taxed up to a maximum of 30% Those in the lower tax bracket are now taxed

17、at 5% on both types of income High dividend paying stock is attractive, now that the tax rate differential has been eliminated by the legislation,1-18,Dividend Payment Procedures,Cash dividends are usually paid quarterly though quoted on an annual basis Dividend yield (%): Annual dividend per share

18、/ current stock price,1-19,Dates Associated with Declaration of Quarterly Dividends,Holder-of-Record Date Date on which the firm examines its books to determine who is entitled to cash dividends Possible if investor has bought or owned the stock before ex-dividend date Ex-Dividend Date Is two-busine

19、ss dates before the holder-of-record date Value of the stock will go down by the value of the quarterly dividend on the ex-dividend date,1-20,Dates Associated with Declaration of Quarterly Dividends (contd),Dividend Payment Date The date when checks will be sent to the entitled stockholders,1-21,Sto

20、ck Dividend,Represents a distribution of additional shares to common stockholders Typically, is in the 10% range Larger distributions of 20-25% or more are usually considered to have the characteristics of a stock split,1-22,XYZ Corporations Financial Position Before Stock Dividend,1-23,XYZ Corporat

21、ions Financial Position after Stock Dividend,1-24,Value to the Investor,Assumption: 1 million shares were outstanding before the stock dividend and 1.1 million shares afterward Assuming that a firm has an after-tax earnings of $6.6 million. Without a stock dividend, earnings per share would be: Earn

22、ings per share = Earnings after taxes Shares outstanding Without stock dividend: = $6.6 million = $6.60 1 million shares With stock dividend: = $6.6 million = %6.00 (10% decline) 1.1 million shares Earnings per share have decreased by exactly the same percentage that shares outstanding increased,1-2

23、5,Value to the Investor (contd),Assuming that Stockholder A had 10 shares before the stock dividend and 11 afterward, his total claims to earnings would be: Claim to earnings = Share X Earnings per share Without stock dividend = 10 X $6.60 = $66 With stock dividend = 11 X $6.00 = $66 Assuming that t

24、he stock sold 20 times earnings before and after the stock dividend, the total market value of the portfolio in each case would be: Total market value = Shares X (P/E ratio X Earnings per share) Without stock dividend = 10 X (20 X $6.60) = 10 X $132 = $1,320 With stock dividend = 11 X (20 X $6.00) =

25、 11 X $120 = $1,320 The total market value is unchanged,1-26,Possible Value of Stock Dividends,If at the time a stock dividend is declared, the cash dividend per share remains constant, the stockholder will receive greater total cash dividends.,1-27,Use of Stock Dividends,Most frequently used by gro

26、wth companies as a form of informational content. Explains the retentions of funds for reinvestment purposes Market reaction may be neutral or slightly positive May also be used to: Camouflage inability of firm to pay dividends Cover up ineffectiveness in generating a cash flow Informed investors ma

27、y react negatively,1-28,Stock Splits,Similar to a stock dividend - only more numbers of shares are distributed The NYSE and the FASB encourage distribution in excess of 20-25% to be handled as stock splits The accounting for a stock split involves: No transfer of funds from retained earnings to the

28、capital accounts Reduction in par value Proportionate increase in the number of outstanding shares,1-29,Stock Splits (contd),The market price of the stock drops proportionately to the split The benefit is almost impossible to capture after the split has been announced Primary purpose of a stock spli

29、t is to: Lower the price into a more popular trading range So companies with a substantial growth in market price can participate,1-30,XYZ Corporation Before and After Stock Split,1-31,Reverse Stock Splits,A firm exchanges fewer shares for existing shares with the intent of increasing the stock pric

30、e Stock price does not always increase by a commensurate amount May represent evidence that the firm is in trouble Main purpose - to attempt to place a stocks value at a level acceptable to: The NYSE The American Stock Exchange The NASDAQ,1-32,Repurchase of Stock as an Alternative to Dividends,A firm with excess cash may choose to repurchase corporate stock Stock repurchase can be thought as an alternative