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1、Chapter 18,Dividend Policy,After Studying Chapter 18, you should be able to:,Understand the dividend retention versus distribution dilemma faced by the firm. Explain the Modigliani and Miller (M 400,000 shares)$ 2,000,000 Additional paid-in capital 1,000,000 Retained earnings 7,000,000 Total shareho

2、lders equity$10,000,000 After 5% Stock Dividend Common stock ($5 par; 420,000 shares)$ 2,100,000 Additional paid-in capital 1,700,000 Retained earnings 6,200,000 Total shareholders equity$10,000,000,Stock Dividends, EPS, and Total Earnings,Assume that investor SP owns 10,000 shares and the firm earn

3、ed $2.50 per share. Total earnings = $2.50 10,000 = $25,000. After the 5% dividend, investor SP owns 10,500 shares and the same proportionate earnings of $25,000. EPS is then reduced to $2.38 per share because of the stock dividend ($25,000 / 10,500 shares = $2.38 EPS).,After a small-percentage stoc

4、k dividend, what happens to EPS and total earnings of individual investors?,Stock Dividends and Stock Splits,Typically 20% or greater of previously outstanding common stock. The material effect on the market price per share causes the transaction to be accounted for differently. Reclassification is

5、limited to the par value of additional shares rather than pre-stock-dividend value of additional shares. Assume a company with 400,000 shares of $5 par common stock outstanding pays a 100% stock dividend. The pre-stock-dividend market value per share is $40. How does this impact the shareholders equ

6、ity accounts?,Large-percentage stock dividends,B/S Changes for the Large-Percentage Stock Dividend,$2 million ($5 400,000 new shares) transferred (on paper) “out of” retained earnings. $2 million transferred “into” common stock account.,Large-Percentage Stock Dividends,Before 100% Stock Dividend Com

7、mon stock ($5 par; 400,000 shares)$ 2,000,000 Additional paid-in capital 1,000,000 Retained earnings 7,000,000 Total shareholders equity$10,000,000 After 100% Stock Dividend Common stock ($5 par; 800,000 shares)$ 4,000,000 Additional paid-in capital 1,000,000 Retained earnings 5,000,000 Total shareh

8、olders equity$10,000,000,Stock Dividends and Stock Splits,Similar economic consequences as a 100% stock dividend. Primarily used to move the stock into a more popular trading range and increase share demand. Assume a company with 400,000 shares of $5 par common stock splits 2-for-1. How does this im

9、pact the shareholders equity accounts?,Stock Split An increase in the number of shares outstanding by reducing the par value of the stock.,Stock Splits,Before 2-for-1 Stock Split Common stock ($5 par; 400,000 shares)$ 2,000,000 Additional paid-in capital 1,000,000 Retained earnings 7,000,000 Total s

10、hareholders equity$10,000,000 After 2-for-1 Stock Split Common stock ($2.50 par; 800,000 shares)$ 2,000,000 Additional paid-in capital 1,000,000 Retained earnings 7,000,000 Total shareholders equity$10,000,000,Value to Investors of Stock Dividends or Stock Splits,Effect on investor total wealth Effe

11、ct on investor psyche Effect on cash dividends More popular trading range Informational content,Stock Dividends and Stock Splits,Used to move the stock into a more popular trading range and increase share demand. Usually signals negative information to the market upon its announcement (consistent wi

12、th empirical evidence). Assume a company with 400,000 shares of $5 par common stock splits 1-for-4. How does this impact the shareholders equity accounts?,Reverse Stock Split A stock split in which the number of shares outstanding is decreased.,Reverse Stock Splits,Before 1-for-4 Stock Split Common

13、stock ($5 par; 400,000 shares)$ 2,000,000 Additional paid-in capital 1,000,000 Retained earnings 7,000,000 Total shareholders equity$10,000,000 After 1-for-4 Stock Split Common stock ($20 par; 100,000 shares)$ 2,000,000 Additional paid-in capital 1,000,000 Retained earnings 7,000,000 Total sharehold

14、ers equity$10,000,000,Stock Repurchase,Reasons for stock repurchase: Available for management stock-option plans Available for the acquisition of other companies “Go private” by repurchasing all shares from outside stockholders To permanently retire the shares,Stock Repurchase The repurchase (buybac

15、k) of stock by the issuing firm, either in the open (secondary) market or by self-tender offer.,Methods of Repurchase,Fixed-price self-tender offer An offer by a firm to repurchase some of its own shares, typically at a set price. Dutch auction self-tender offer A buyer (seller) seeks bids within a

16、specified price range, usually for a large block of stock or bonds. After evaluating the range of bid prices received, the buyer (seller) accepts the lowest price that will allow it to acquire (dispose of)the entire block. Open-market purchase A company repurchases its stock through a brokerage hous

17、e on the secondary market.,Repurchasing as Part of Dividend Policy,Assume: Earnings after taxes $ 800,000 Number of common shares outstanding 400,000 Earnings per share $ 2 Current market price per share $ 31 Expected dividend per share $ 1 Expected total dividends to be paid out $ 400,000,Repurchas

18、ing as Part of Dividend Policy,If dividend is paid, shareholders receive: Expected dividend per share $ 1 Market price per share $ 30 Total value $ 31 If shares repurchased, shareholders receive: Dividend per share $ 0 Market price per share* $ 31 Total value $ 31 Shares repurchased = $400,000 / $31

19、 = 12,903 Original P/E ratio = $30/$2 = 15 “New” EPS= $800,000 / 387,097= $2.07 “New” market price= $2.07 15= $31,Summary of Repurchasing as Part of Dividend Policy,The capital gain arising from the repurchase (stock rising from $30 to $31) exactly equals the dividend ($1) that would have otherwise

20、been paid. This result holds in the absence of taxes and transaction costs. To the taxable investor, capital gains (repurchases) are favored to dividend income as the tax on the capital gain is postponed until the actual sale of the common shares.,Summary of Repurchasing as Part of Dividend Policy,S

21、tock repurchases are most relevant for firms with large amounts of excess cash that might otherwise generate a significant taxable transaction to investors. Firms must be careful not to make regularly occurring repurchases or the IRS may consider the capital gains as dividends for tax purposes.,Inve

22、stment or Financing Decision?,Financing Decision It possesses capital structure or dividend policy motivations. For example, a repurchase immediately changes the debt-to-equity ratio (higher financial leverage).,Investing Decision Not really, as stock that is repurchased is held as treasury stock an

23、d does not provide an expected return like other investments.,Possible Signaling Effect,Repurchases have a positive signaling effect. For example, if the stock is undervalued management may tender for shares at a “premium.” This signals that the share prices are undervalued. Dutch-auction self-tende

24、rs have less signaling power likely due to a smaller tender premium. Open-market purchases have only a modest positive signaling effect likely due to many programs being instituted after significant share price declines.,How Dividends Are Paid,Declaration date 股利宣告日,Payment date支付日,Record date 股权登记日

25、,Ex-dividend date 除息日,Administrative Considerations: Procedural Aspects,Record Date The date, set by the board of directors when a dividend is declared, on which an investor must be a shareholder of record to be entitled to the upcoming dividend. The board of directors met on May 8th to declare a di

26、vidend payable to shareholders on June 15th to the shareholders of record on May 31st.,May 8,May 29,May 31,June 15,Administrative Considerations: Procedural Aspects,Ex-dividend Date The first date on which a stock purchaser is no longer entitled to the recently declared dividend. The buyer and seller of the shares have several days to settle (pay for the shares or deliver the shares). The brokerage industry has a rule that new shareholders are entitled to dividends only if they purchase the stock at least two busin

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