---Provide proof of cash flows, but not proof of future cash flows
Firm with +NPV projects can pay dividends, issue new shares, or retain earnings
Firm with no
+NPV = pay dividends
holding cash would be a waste
How Dividends are paid
: [Declaration, Ex-Dividend, Record, Payment]—No div on Ex-Div
Types of Dividends
- Regular Cash (quarterly, constant) Special Div (One-time)
In-Kind (could be liquidating—Product Dividend) Stock Div (New shares (like stock split)
Stock Div- can be seen as good b/c cash disbursements up; Special Div like stock repurchase
**Pay div in short w/out profits= liquidate, borrow, issue stock, use cash—can’t do long run*
Need income (retirees), firms (70% tax), Investors w/ high-yld stocks
- Doesn’t matter if a proj. is funded with cash or new shares w/divdend
^ No Asymmetrical. Info, no tax, no trans cost (Perfect Cap Mkt)—Div policy is irrelevant
Tax rate; currently tax on div and cap gains is the same.
Div are taxed in
the year in which they are paid, cap gains are taxed in the year the stock is sold (could be
never.) The effective tax rate on cap gains is lower than the effective tax rate on dividends.
Overall tax policy DOES NOT seem to effect corporate behavior.
Rate of stock appreciation
should be equal to rrr on stock.
Pension funds are untaxed- Corporations prefer dividends
because dividend income is 70% tax excluded.
DRIPS- Div Reinvestment Plans
- Take money used to pay div, and buy more stock 4 them
Level of Div. Payment
- Set long run target payout ratios, focus on div change not the
absolute level of the dividend, would rather issue new stock or bonds then cut dividends
---If price is cut for good reason, price still falls until it is proven it was not sign of distress—
****A price lower than it should be can lead the firm to be a takeover target*****
- firm says a series of $ they will buy stock back—Shareholders offer them
directly negotiates with S/H to buy back for large premium (to prevent takeover)
^^The remaining shareholders are hurt, this is a negative NPV investment^^^
—buy in mrkt like any investor-or-Buy back stated # at fixed price
^^Managers DO NOT want to repurchase if stock is overvalued, buy when too low^^^
A stock buyback could be signal price should be higher—Japan has less asymmetrical info so
stock price reaction to dividend changes is smaller
How would you expect each of the following changes to affect payout ratios, all else equal?
An increase in personal tax income
(no effect if same rate as cap gains, decrease if taxed as
Increase in # of +NPV Projects
Corporations deducting div for tax
Change so unrealized cap gains are taxed same as div
Pro’s and cons of announcing future div policy—