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Payout Policy: Mcgraw-Hill/Irwin
Payout Policy: Mcgraw-Hill/Irwin
Payout Policy
McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
16- 2
Payout Policies
16- 3
300
200
100
0
80
84
86
90
92
96
98
00
02
82
88
94
19
19
19
19
19
19
19
19
19
19
20
20
16- 4
Types of Dividends
Cash Div
Regular Cash Div
Special Cash Div
Stock Div
Stock Repurchase (4 methods)
1. Buy shares on the market
2. Tender Offer to Shareholders
3. Dutch Auction
4. Private Negotiation (Green Mail)
16- 5
Dividend Payments
Dividend Payments
Stock Dividend - Distribution of additional
shares to a firm’s stockholders.
Dividend Policy
Impact of Dividend Changes on EPS
15
Change EPS/Price at t = 0 as %
10
-5
Div Rise
Div Cut
-10
-15
Year
Source: Healy & Palepu (1988)
16- 11
Dividend Policy
Before After
Dividend Dividend
New
stockholders
Each share
Total value of firm
worth this
before … … and
worth
this
after Old
stockholders
Example of 1/3rd of worth paid as dividend and raising money via new shares
16- 12
Dividend Policy
Cash
Record Date
Cash 1,000
Asset Value 9,000
Total Value 10,000 +
New Proj NPV 2,000
# of Shares 1,000
price/share $12
16- 15
Record
Stock 12,000
Cash 0
Record Pmt
Stock 12,000 11,000
Cash 0 1,000
Dividends as Signals
Dividend increases send good news about cash
flows and earnings. Dividend cuts send bad news.
Tax Consequences
Companies can convert dividends into capital
gains by shifting their dividend policies. If
dividends are taxed more heavily than capital
gains, taxpaying investors should welcome such a
move and value the firm more favorably.
Firm A Firm B
(no dividend) (high dividend)
Next year' s price 112.50 102.50
Dividend 0 10
Total pretax payoff 112.50 112.50
Today' s stock price 100 97.78
Capital gain 12.50 4.72
Pretax rate of return (%) 12.5
100 100 12.5 14.72
97.78 100 15.05
Tax on div @ 50% 0 .40 10 4.00
Tax on Cap Gain @ 20% .20 12.50 2.50 .20 4.72 0.94
Total After Tax income
(0 12.50) 2.50 10 (10 4.72) (4 0.94) 9.78
(div cap gain - taxes)
After tax rate of return (%) 100 100 10.0 100 10.0
10 9.78
97.78
16- 25
Cash Flow