Bài giảng Management theory and practice Financial: Chapter 13

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Bài giảng Management theory and practice Financial: Chapter 13 được trình bày cụ thể với các vấn đề: Distribution level and firm value; Theories of investor preferences; Stock dividends and stock splits; Dividend reinvestment plans;... Mời các bạn cùng tìm hiểu và tham khảo nội dung thông tin tài liệu.

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Nội dung Text: Bài giảng Management theory and practice Financial: Chapter 13

PowerPoint Presentation prepared by Traven Reed Canadore College
chapter 13 Distributions to Shareholders: Dividends and Repurchases
Corporate Valuation and Distribution to Shareholders CH13 Copyright © 2011 by Nelson Education Ltd. 13-3
Topics in Chapter CH13 • Distribution level and firm value • Theories of investor preferences • Signaling effects • Residual model • Stock repurchases • Stock dividends and stock splits • Dividend reinvestment plans Copyright © 2011 by Nelson Education Ltd. 13-4
What is “distribution policy”? CH13 • The distribution policy defines: – The level of cash distributions to shareholders – The form of the distribution (dividend vs. stock repurchase) – The stability of the distribution Copyright © 2011 by Nelson Education Ltd. 13-5
Dividend Yields for Selected Countries CH13 World Stock Market (Index) Div. Yield % Egypt 17.0 New Zealand 4.6 Argentina 3.4 Britain (FTSE All Share) 3.1 France 2.7 Canada (S&P/TSX Comp) 2.5 United States (S&P 500) 1.9 Japan 1.4 India (BSE-500) 0.7 Copyright © 2011 by Nelson Education Ltd. 13-6
Do investors prefer high or low payouts? There are three theories: CH13 • Dividends are irrelevant: Investors don’t care about payout. • Bird-in-the-hand: Investors prefer a high payout. • Tax preference: Investors prefer a low payout, hence growth. Copyright © 2011 by Nelson Education Ltd. 13-7
Dividend Irrelevance Theory CH13 • Investors are indifferent between dividends and retention-generated capital gains. If they want cash, they can sell stock. If they don’t want cash, they can use dividends to buy stock. • Modigliani-Miller support irrelevance. • Theory is based on unrealistic assumptions (no taxes or brokerage costs), hence may not be true. Need empirical test. Copyright © 2011 by Nelson Education Ltd. 13-8
Bird-in-the-Hand Theory CH13 • Investors think dividends are less risky than potential future capital gains, hence they like dividends. • If so, investors would value high payout firms more highly, i.e., a high payout would result in a high stock price. Copyright © 2011 by Nelson Education Ltd. 13-9
Tax Preference Theory CH13 • Low payouts mean higher capital gains. Capital gains taxes are deferred. • This could cause investors to prefer firms with low payouts, i.e., a high payout results in a low stock price. Copyright © 2011 by Nelson Education Ltd. 13-
Implications of 3 Theories for Managers CH13 Theory Implication Irrelevance Any payout OK Bird-in-the-hand Set high payout Tax preference Set low payout Copyright © 2011 by Nelson Education Ltd. 13-11
Impacts on Stock Price and CH13 Cost of Equity Copyright © 2011 by Nelson Education Ltd. 13-
Empirical Results of the Dividend Theories CH13 • Empirical testing has not been able to determine which theory, if any, is correct. Thus, managers use judgment when setting policy. • The portion of dividend-paying companies has declined • Payout ratio remains stable at about 26% to 28% • Older firms tend to pay cash dividends Copyright © 2011 by Nelson Education Ltd. 13-
“Clientele effect” CH13 • Different groups of investors, or clienteles, prefer different dividend policies. • Firm’s past dividend policy determines its current clientele of investors. • Clientele effects impede changing dividend policy. Taxes & brokerage costs hurt investors who have to switch companies due to a change in payout policy. Copyright © 2011 by Nelson Education Ltd. 13-
Information Content, or Signaling hypothesis? CH13 • Investors view dividend changes as signals of management’s view of the future. Managers hate to cut dividends, so won’t raise dividends unless they think raise is sustainable. • Therefore, a stock price increase at time of a dividend increase could reflect higher expectations for future EPS, not a desire for dividends. Copyright © 2011 by Nelson Education Ltd. 13-
Implications for CH13 Dividend Stability • Clientele effect and information content hypotheses imply that investors prefer stable dividends • A stable policy means the regular cash dividends should grow at a steady, predictable rate • Reducing dividends to make funds available for capital investment could send incorrect signals to investors Copyright © 2011 by Nelson Education Ltd. 13-
What’s the “residual distribution model”? CH13 • Find the reinvested earnings needed for the capital budget. • Pay out any leftover earnings (the residual) as either dividends or stock repurchases. • This policy minimizes flotation and equity signaling costs, hence minimizes the WACC. Copyright © 2011 by Nelson Education Ltd. 13-
Using the Residual Model to Calculate Distributions Paid CH13 [( )( )] Net Target Total Distr. = – equity capital . income ratio budget This long-run target distribution ratio allows firms to meet equity requirements with retained earnings. Copyright © 2011 by Nelson Education Ltd. 13-
Residual Distribution Model: Illustration CH13 • Capital budget: $800,000 (given). • Target capital structure: 40% debt, 60% equity. Need to be maintained. • Forecasted net income: $600,000 • If all distributions are in the form of dividends, how much of the $600,000 should we pay out as dividends? Copyright © 2011 by Nelson Education Ltd. 13-
Residual Distr. Model:(cont’d) CH13 • Of the $800,000 capital budget, 0.6($800,000) = $480,000 must be equity to keep at target capital structure. So 0.4($800,000) = $320,000 will be debt. • With $600,000 of net income, the residual is $600,000 - $480,000 = $120,000 = dividends paid. • Payout ratio = $120,000/$600,000 = 0.20 = 20% Copyright © 2011 by Nelson Education Ltd. 13-