CORPORATEFINANCEInternationalFinanceCollege

LanYuPing(AssociateProfessor)0Chapter14DividendsandDividendPolicy1KeyConceptsandSkillsUnderstanddividendtypesandhowtheyarepaidUnderstandtheissuessurroundingdividendpolicydecisionsUnderstandthedifferencebetweencashandstockdividendsUnderstandwhysharerepurchasesareanalternativetodividends214ChapterOutline14.1CashDividendsandDividendPayment14.2DoesDividendPolicyMatter?14.3EstablishingaDividendPolicy14.4StockRepurchase:AnAlternativetoCashDividends14.5StockDividendsandStockSplits314.1DividendsTypes“Twohandedlawyer〞problemP420Payhighdividends?Paylowdividends?414.1.1CashDividendsRegularcashdividend–cashpaymentsmadedirectlytostockholders,sometimeseachquarterExtracashdividend–indicationthatthe“extra〞amountmaynotberepeatedinthefutureSpecialcashdividend–similartoextradividend,butdefinitelywon’tberepeatedLiquidatingdividend–someorallofthebusinesshasbeensold5五糧液派息除權案例6714.1.2DividendPaymentTradingandsettlementdate-T+2?DeclarationDate–BoarddeclaresthedividendanditbecomesaliabilityofthefirmEx-dividendDate(除權日Ex:無權得到，不包括)OccurstwobusinessdaysbeforedateofrecordIfyoubuystockonorafterthisdate,youwillnotreceivethedividendStockpricegenerallydropsbyabouttheamountofthedividendDateofRecord–HoldersofrecordaredeterminedandtheywillreceivethedividendpaymentDateofPayment–checksaremailed8Figure14.2TheEx-DayPriceDrop914.2DoesDividendPolicyMatter?Dividendsmatter–thevalueofthestockisbasedonthepresentvalueofexpectedfuturedividendsDividendpolicymaynotmatterDividendpolicyisthedecisiontopaydividendsversusretainingfundstoreinvestinthefirmIntheory,ifthefirmreinvestscapitalnow,itwillgrowandcanpayhigherdividendsinthefuture1014.2.1IllustrationofIrrelevanceExampleonP423-424Whartonisall-equityfirmandwilldissolveintwoyears;Theexpectedcashflowis$10000inoneyearand$10000intwoyears;Case1:Expecteddividends$100inyear1and$100inyear2Thenthemarketvalueis$173.55(sumofpresentvaluesoftwoyearsdividends).1114.2.1IllustrationofIrrelevance枝節(jié)問題ExampleonP423-424Case2:Expecteddividendis$110inyearoneandthereforeWhartonmustraise$1000byissuing10newsharesat10%yield.Theexpecteddividendbecome$89inyeartwo(10000-1100)/100.Thenthemarketvalueisalso$173.55(sumofpresentvaluesoftwoyearsdividends)Ifthecompanywillearntherequiredreturn,thenitdoesn’tmatterwhenitpaysthedividends1214.2.2LowPayout？Whymightalowpayoutbedesirable?Individualsinupperincometaxbracketsmightpreferlowerdividendpayouts,withtheimmediatetaxconsequences,infavorofhighercapitalgainsFlotationcosts(籌資本錢)–lowpayoutscandecreasetheamountofcapitalthatneedstoberaised,therebyloweringflotationcostsDividendrestrictions–debtcontractsmightlimitthepercentageofincomethatcanbepaidoutasdividends1314.2.3HighPayout？1414.2.4ClienteleEffect(客戶效應)SomeinvestorspreferlowdividendpayoutsandwillbuystockinthosecompaniesthatofferlowdividendpayoutsSomeinvestorspreferhighdividendpayoutsandwillbuystockinthosecompaniesthatofferhighdividendpayouts。Clienteleeffect:theargumentthatstocksattractparticulargroupsbasedondividendyieldandtheresultingtaxeffects.1514.2.5ImplicationsoftheClienteleEffectWhatdoyouthinkwillhappenifafirmchangesitspolicyfromahighpayouttoalowpayout?Whatdoyouthinkwillhappenifafirmchangesitspolicyfromalowpayouttoahighpayout?Ifthisisthecase,doesdividendPOLICYmatter?1614.2.6InformationContentofDividendsStockpricesgenerallyrisewithunexpectedincreasesindividendsandfallwithunexpecteddecreasesindividendsDoesthismeanthattheaverageinvestorprefersahighdividendpayoutratio?No–changesinthedividendsendasignalaboutmanagement’sviewconcerningfutureprospects1714.3DividendPolicyinPractice1814.3.1ResidualDividendPolicyDeterminecapitalbudgetDeterminetargetcapitalstructureFinanceinvestmentswithacombinationofdebtandequityinlinewiththetargetcapitalstructureRememberthatretainedearningsareequityIfadditionalequityisneeded,issuenewsharesIfthereareexcessearnings,thenpaytheremainderoutindividends1914.3.1.1Example–ResidualDividendPolicyGivenNeed$5millionfornewinvestmentsTargetcapitalstructure:D/E=2/3NetIncome=$4millionFindingdividend40%financedwithdebt(2million)60%financedwithequity(3million)NI–equityfinancing=$1million,paidoutasresidualdividendsThenewinvestmentwillbefinancedby3mretainedearningand2mnewdebt,whiletheD/Eratioremainsas2/32014.3.2CompromiseDividendPolicyGoals,rankedinorderofimportanceAvoidcuttingbackonpositiveNPVprojectstopayadividendAvoiddividendcutsAvoidtheneedtosellequityMaintainatargetdebt/equityratioMaintainatargetdividendpayoutratioCompanieswanttoacceptpositiveNPVprojects,whileavoidingnegativesignals21CompanybuysbackitsownsharesofstockTenderoffer標價收購–companystatesapurchasepriceandadesirednumberofsharesOpenmarket–buysstockintheopenmarketExampleonP430-431SimilartoacashdividendinthatitreturnscashfromthefirmtothestockholdersThisisanotherargumentfordividendpolicyirrelevanceintheabsenceoftaxesorotherimperfections2214.4.1Real-WorldConsiderationsStockrepurchaseallowsinvestorstodecideiftheywantthecurrentcashflowandassociatedtaxconsequencesInvestorsfacecapitalgainstaxesinsteadofordinaryincometaxes(capitalgainstaxislower)Inourcurrenttaxstructure,repurchasesmaybemoredesirableduetotheoptionsprovidedstockholdersTheIRSrecognizesthisandwillnotallowastockrepurchaseforthesolepurposeofallowinginvestorstoavoidtaxes2314.4.2InformationContentofStockRepurchasesStockrepurchasessendsapositivesignalthatmanagementbelievesthatthecurrentpriceislowTenderofferssendamorepositivesignalthanopenmarketrepurchasesbecausethecompanyisstatingaspecificpriceThestockpriceoftenincreaseswhenrepurchasesareannounced2414.4.3StockRepurchaseAnnouncement(公告)“AmericaWestAirlinesannouncedthatitsBoardofDirectorshasauthorizedthepurchaseofupto2.5millionsharesofitsClassBcommonstockontheopenmarketascircumstanceswarrantoverthenexttwoyears…“Followingtheapprovalofthestockrepurchaseprogrambythecompany’sBoardofDirectorsearliertoday.W.A.Franke,chairmanandchiefofficersaid‘ThestockrepurchaseprogramreflectsourbeliefthatAmericaWeststockmaybeanattractiveinvestmentopportunityfortheCompany,anditunderscoresourcommitmenttoenhancinglong-termshareholdervalue.’“Theshareswillberepurchasedwithcashonhand,butonlyifandtotheextenttheCompanyholdsunrestrictedcashinexcessof$200milliontoensurethatanadequatelevelofcashandcashequivalentsismaintained.〞2514.5StockDividendsandStocksplits(紅股與拆股)Currentstockholdersreceiveextrasharesinfree.2614.5.1StockdividendsPayadditionalsharesofstockinsteadofcashasdividends;Increasesthenumberofoutstandingshares;SmallstockdividendLessthan20to25%Ifyouown100sharesandthecompanydeclareda10%stockdividend,youwouldreceiveanadditional10sharesinfreeLargestockdividend