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548-Week 10 MBA.PM Spring 2010

548-Week 10 MBA.PM Spring 2010 - Dividend Policy and Course...

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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)
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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
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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.
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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
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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
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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
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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 = - +
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J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Dividend Debate Taxation issues (past and current) Information in dividends Cash payment signals real cash flows
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