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FM12 Ch 18 Show

FM12 Ch 18 Show - CHAPTER18 1 TopicsinChapter...

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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 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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  5 Do investors prefer high or low  payouts?  There are 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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  6 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. Theory is based on unrealistic assumptions  (no taxes or brokerage costs), hence may not  be true.  Need empirical test.
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  7 Bird-in-the-Hand Theory 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.
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  8 Tax Preference Theory 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.
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  9 Implications of 3 Theories for  Managers Theory Implication Irrelevance Any payout OK Bird-in-the-hand Set high payout Tax preference Set low payout
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  10 Which theory is most correct?
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