548-Week 10 MBA.PM Spring 2010

548-Week 10 MBA.PM Spring 2010 - J. K. Dietrich - GSBA 548...

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Unformatted text preview: J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Dividend Policy and Course Summary Week 10: May 3 and 5, 2010 (LA) May 4 and 6, 2010 (OCC) J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Raising Funds in United States ◆ Available funds – Internal funds – Current shareholders – Private sources: banks, private placements – Public Sources: short-term, long-term ◆ Securities Acts of 1933 and 1934 ◆ Investment bankers and costs of funds J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Capital Structure in Practice ◆ Most firms in the U. S. are mainly equity financed despite tax advantage of debt ◆ Most firm financing is internally generated cash in the U. S. ◆ U.S. firms use less debt (Table 17.4, p. 545) and it varies by industry (Table 17.5, p. 546) ◆ Debt markets – Bank and privately placed debt in Japan, EEC – Public debt markets and banks in U.S. J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Dividend Policy ◆ The dividend decision – Board of directors deliberation – Dividends and investment – Announcement and payment of dividend ◆ Dividends as a source of cash for investors ◆ Tax treatment of dividends – Individuals and other investors – Combination of corporate and individuals ◆ Equilibrium in capital markets J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Summary M-M Debate Issues M-M ISSUES STATE OF DEBATE CAPITAL STRUCTURE IRRELEVANT (1) TAXES (2) BANKRUPTCY (3) AGENCY (4) EQUILIBRIUM TRADEOFFS DIVIDENDS IRRELEVANT (1) INFORMATION (2) TAXES (3) MILLER- SCHOLES EVIDENCE J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 M-M Dividend Irrelevance ◆ Assume no taxation and efficient markets ◆ Stockholders can create cash flows equivalent to dividends by selling shares ( homemade dividends ) ◆ Shareholders not needing cash can reinvest dividends in stock ◆ Reinvested earnings (not paid as dividends) grow at firm’s rate of return and produce gains ◆ New equity dilutes old claims on income J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Investment and Dividends ◆ Firms should invest in all NPV>0 projects ◆ Investment determines a firm’s value: ◆ Value of firm (with or without debt) depends on the value from investments ◆ Cash dividends increase need for new equity Investment Income Dividends New Equity = - + J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Dividend Debate ◆ Taxation issues (past and current)...
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This note was uploaded on 02/11/2012 for the course FBE 443 taught by Professor Imrohoroglu during the Spring '07 term at USC.

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548-Week 10 MBA.PM Spring 2010 - J. K. Dietrich - GSBA 548...

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