1 / 9

Intro to Financial Management

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.

jimbo
Download Presentation

Intro to Financial Management

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Intro to Financial Management Dividend Policy

  2. 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

  3. Dividend Policy • Dividend payout ratio = dividend per share / earnings per share • Tradeoff between • Dividends and future growth • Dividends and external financing

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

More Related