intro to financial management
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Intro to Financial Management. Dividend Policy. Review. Homework Income stream risks Business risks Operating risk Break-even analysis Operating leverage Capital structure Leverage Coverage ratio Match maturity of financing with ‘maturity’ of asset. Dividend Policy.

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Presentation Transcript
review
Review
  • Homework
  • Income stream risks
  • Business risks
  • Operating risk
    • Break-even analysis
    • Operating leverage
  • Capital structure
    • Leverage
    • Coverage ratio
    • Match maturity of financing with ‘maturity’ of asset
dividend policy
Dividend Policy
  • Dividend payout ratio

= dividend per share / earnings per share

  • Tradeoff between
    • Dividends and future growth
    • Dividends and external financing
dividend policy and stock price
Dividend Policy and Stock Price
  • Three views
  • No effect
  • High dividend will increase the stock price

Reason – less risk to investor

  • Low dividend will increase the stock price

Reason – investors can defer taxes

dividend payment theories
Dividend Payment Theories
  • Residual Dividend Theory
    • Pay dividend only if no more investments to make with the cash
  • Clientele Effect
    • Those who want dividends, will invest in dividend paying stocks
    • Those that don’t, won’t
  • Information Effect
    • Dividend payout changes can signal information from the firm
  • Agency Costs
    • Costs, such as reduced stock price, due to agency conflict
    • Dividends may reduce these costs
  • Expectations Theory
    • Market reacts as reality changes relative to their expectations
dividends in practice
Dividends in Practice
  • Legal restrictions
    • E.g. must have assets > liabilities
  • Liquidity constraints
    • May not have the cash
  • Earnings predictability
    • Future years may not have as good cash flows
  • Maintaining Ownership Control
    • May retain earnings so do not have to issue new stock
dividend policies
Dividend Policies
  • Constant dividend payout ratio
    • Percent of earning paid is constant
    • Dollar amount will not be
  • Stable dollar dividend
    • Relatively stable (constant) payout
    • Will change only when management thinks appropriate
  • Small regular dividend plus year-end extra
  • One-time dividend payout
stock dividend and stock splits
Stock Dividend and Stock Splits
  • Stock dividend
    • Distribution of shares proportionate to current holding
  • Stock split
    • Exchange current shares for new, more shares
  • Same effect, different accounting
  • Why?
    • Optimal trading range, perhaps
    • Signal information, perhaps
stock repurchases
Stock Repurchases
  • When firm buys back its stock from the market
  • Why?
    • Reduces shares on the market
    • Increases EPS, ROE
    • Increases leverage
    • Reduces costs of small (e.g. fractional) shareholders
    • Result, higher stock price
  • What should a firm do with excess cash?Give dividends or repurchase shares?
    • Want long-term gain or cash now?
    • Theoretically, owners should not care
    • Note that Apple is doing both
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