FM12 Ch 18 DivPolicy Show

FM12 Ch 18 DivPolicy Show - CHAPTER 18 Distributions to...

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  1 CHAPTER 18 Distributions to Shareholders:  Dividends and Repurchases
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  2 Topics in Chapter Theories of investor preferences Signaling effects Residual model Stock repurchases Stock dividends and stock splits Dividend reinvestment plans
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  3 What is “distribution policy”? 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
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  4 What is dividend policy? It’s decision to pay out earnings vs.  elements: 1. High or low payout? 2. Stable or irregular dividends? 3. How frequent? 4. Is policy announced?
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  5 Dividend Yields for Selected  Industries Industry Div. Yield % Major Airlines 0.0 Biotechnology 0.1 Software 1.0 Chemicals 2.9 Food 3.0 Electric Utilities 3.4 Banks 3.6 Tobacco 5.5 Source: Yahoo Industry Data
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  6 Do investors prefer high or low  payouts?  Three theories: 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.
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  7 Dividend Irrelevance Theory Value depends on income produced by  assets, not income split b/w dividends and RE 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. Theory is based on unrealistic assumptions  (no taxes or brokerage costs).  Needs testing.  Modigliani-Miller support irrelevance.
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  8 Bird-in-the-Hand Theory Investors think dividends are less risky  than potential future capital gains, prefer  dividends. If so, investors would value high payout  firms more highly, i.e., a high payout  lower cost of equity).
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9 Tax Preference Theory Low payouts mean higher capital gains.  Capital gains taxes are deferred,  creating TVM benefits of taxes not paid  today. This could cause investors to prefer 
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FM12 Ch 18 DivPolicy Show - CHAPTER 18 Distributions to...

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