IFM10 Ch17 Lecture(1)

IFM10 Ch17 Lecture(1) - CHAPTER 17 Distributions to...

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CHAPTER 17 Distributions to Shareholders: Dividends and Repurchases 1
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Topics in Chapter Theories of investor preferences Signaling effects Residual model Stock repurchases Stock dividends and stock splits Dividend reinvestment plans 2
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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 3
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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 are now greater 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. 4
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Dividend Yields for Selected Industries Industry Div. Yield % Recreational Products 3.30 Forest Products 3.79 Software 1.48 Household Products 1.55 Food 1.16 Electric Utilities 3.48 Banks 4.46 Tobacco 9.88 Source: Yahoo Industry Data, April 2008 5
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Do investors prefer high or low payouts? There are three 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. 6
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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). 7
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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
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This note was uploaded on 02/13/2012 for the course FINA 4080 taught by Professor Mary during the Spring '11 term at Toledo.

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IFM10 Ch17 Lecture(1) - CHAPTER 17 Distributions to...

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