Ch 14 Slide Show

Ch 14 Slide Show - CHAPTER14 DistributionstoShareholders:

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1 CHAPTER 14 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 Free cash flow (FCF) Interest payments (after tax) Stock repurchases Principal repayments Dividends Sales revenues Operating costs and taxes Required investments in operating capital = Free Cash Flow: Distributions to Shareholders Purchase of short-term investments Sources Uses
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4 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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5 Distributions Patterns Over  Time The percent of total payouts a a percentage of net  income has been stable at around 26%-28%. Dividend payout rates have fallen, stock repurchases have  increased. Repurchases now total more dollars in distributions than  dividends.  A smaller percentage of companies now pay  dividends. When young companies first begin making  distributions, it is usually in the form of repurchases. Dividend payouts have become more concentrated in  a smaller number of large, mature firms. 
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6 Dividend Yields for Selected  Industries Industry Div. Yield % Recreational Products 0.02 Forest Products 0.91 Software 0.32 Household Products 0.62 Food 0.04 Electric Utilities 1.10 Banks 0.21 Tobacco 0.45 Source: Yahoo Industry Data, March 2009
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7 Do investors prefer high or low  payouts? There are three dividend theories: Dividends are irrelevant: Investors don’t  care about payout. Dividend preference, or bird-in-the-hand:  Investors prefer a high payout. Tax effect: Investors prefer a low payout.
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8 Dividend Irrelevance Theory 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. Implies payout policy has no effect on stock  value or the required return on stock. Theory is based on unrealistic assumptions  (no taxes or brokerage costs).
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9 Dividend Preference (Bird-in- the-Hand) Theory Investors might think dividends (i.e., the-bird- in-the-hand) are less risky than potential  future capital gains. Also, high payouts help reduce agency costs  by depriving managers of cash to waste and  causing managers to have more scrutiny by  going to the external capital markets more  often. Therefore, investors would value high payout  firms more highly and would require a lower  return to induce them to buy its stock.
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10 Tax Effect Theory Low payouts mean higher capital gains.  Capital gains taxes are deferred until  they are realized, so they are taxed at a  lower effective rate than dividends. This could cause investors to require a 
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Ch 14 Slide Show - CHAPTER14 DistributionstoShareholders:

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