divid - Aswath Damodaran 129 Returning Cash to the Owners:...

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Unformatted text preview: Aswath Damodaran 129 Returning Cash to the Owners: Dividend Policy “Companies don’t have cash. They hold cash for their stockholders.” Aswath Damodaran 130 First Principles Invest in projects that yield a return greater than the minimum acceptable hurdle rate . • The hurdle rate should be higher for riskier projects and reFect the ¡nancing mix used - owners’ funds (equity) or borrowed money (debt) • Returns on projects should be measured based on cash Fows generated and the timing of these cash Fows; they should also consider both positive and negative side effects of these projects. Choose a ¡nancing mix that minimizes the hurdle rate and matches the assets being ¡nanced. If there are not enough investments that earn the hurdle rate, return the cash to stockholders. • The form of returns - dividends and stock buybacks - will depend upon the stockholders ’ characteristics . Objective: Maximize the Value of the ¢irm Aswath Damodaran 131 Steps to the Dividend Decision… Cashflow from Operations Cashflows to Debt (Principal repaid, Interest Expenses) Cashflows from Operations to Equity Investors Reinvestment back into the business Cash available for return to stockholders Cash held back by the company Cash Paid out Stock Buybacks Dividends How much did you borrow? How good are your investment choices? What is a reasonable cash balance? What do your stockholders prefer? Aswath Damodaran 132 I. Dividends are sticky Aswath Damodaran 133 II. Dividends tend to follow earnings Aswath Damodaran 134 III. More and more frms are buying back stock, rather than pay dividends... Aswath Damodaran 135 IV. But the change in dividend tax law in 2003 may cause a shift back to dividends Aswath Damodaran 136 Measures of Dividend Policy Dividend Payout: • measures the percentage of earnings that the company pays in dividends • = Dividends / Earnings Dividend Yield : • measures the return that an investor can make from dividends alone • = Dividends / Stock Price Aswath Damodaran 137 Dividend Payout Ratios: January 2007 Aswath Damodaran 138 Dividend Yields in the United States: January 2007 Aswath Damodaran 139 Three Schools Of Thought On Dividends 1. If • (a) there are no tax disadvantages associated with dividends • (b) companies can issue stock, at no cost, to raise equity, whenever needed • Dividends do not matter, and dividend policy does not affect value. 2. If dividends have a tax disadvantage, • Dividends are bad, and increasing dividends will reduce value 3. If stockholders like dividends, or dividends operate as a signal of future prospects, • Dividends are good, and increasing dividends will increase value Aswath Damodaran 140 The balanced viewpoint If a company has excess cash, and few good investment opportunities (NPV>0), returning money to stockholders (dividends or stock repurchases) is good ....
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This note was uploaded on 05/20/2010 for the course DOF AAf001-6 taught by Professor Changchungdo during the Spring '10 term at 카이스트, 한국과학기술원.

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divid - Aswath Damodaran 129 Returning Cash to the Owners:...

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