...The dividend decision of a firm is intrinsically related to the financing and investment decision. This association has given rise to various questions such as the size of the dividend, the effect on the valuation of the firm and the like. Even after multiple researches carried out, the dividend decision still remains a mystery to be solved. Lintner (1956) contends that it is current earnings and the past dividends which determines the target dividend ratio in the developed market. The firms have to make various adjustments in order to attain such target and thus have to follow a stable dividend policy [2]. Miller and Modigliani(1961) argues that since market perfections, zero transaction costs, perfect certainty and indifferent behavior of...
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...Synopsis and Objectives Other cases in which dividend policy is an important issue: “Deutsche Brauerei,” (Case 11) In mid September 2005, Ashley Swenson, the chief financial officer (CFO) of a large computer-aided design and computer-aided manufacturing (CAD/CAM) equipment manufacturer needed to decide whether to pay out dividends to the firm’s shareholders, or to repurchase stock. If Swenson chose to pay out dividends, she would have to also decide upon the magnitude of the payout. A subsidiary question is whether the firm should embark on a campaign of corporate-image advertising, and change its corporate name to reflect its new outlook. The case serves as an omnibus review of the many practical aspects of the dividend and share buyback decisions, including (1) signaling effects, (2) clientele effects, and (3) the finance and investment implications of increasing dividend payouts and share repurchase decisions. This case can follow a treatment of the Miller-Modigliani dividend-irrelevance theorem and serves to highlight practical considerations to consider when setting a firm’s dividend policy. Suggested Questions for Advance Assignment to Students The instructor could assign supplemental reading on dividend policy and share repurchases. Especially recommended are the Asquith and Mullins article on equity signaling, and articles by Stern Stewart on financial communication. 1. In theory, to fund an increased dividend payout or a stock buyback, a firm might invest...
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...Table of Contents | | Page | | Chapter 1 | | 1.0 | Introduction | | 1.1 | The background of dividend reinvestment plans in Malaysia | | 1.2 | Discussion on relevant issues | | 1.3 | Problem statement | | 1.4 | Objectives | | 1.5 | Significance of the study | | 1.6 | Scope of the study | | | | | | Chapter 2 | | 2.0 | Introduction/ An Overview | | 2.1 | Theoretical Framework of DRIP in Investors’ Point of View | | 2.2 | Theoretical Framework of DRIP in Investees’ Point of View | | 2.3 | Concluding Remarks | | | | | | Chapter 3 | | 3.0 | Introduction | | 3.1 | Data Description | | 3.2 | Theoretical Framework | | 3.3 | Empirical Model of the study | | 3.4 | Methods to be Used | | 3.5 | Concluding Remarks | | | | | | References | | | | | 1.0 Introduction: Dividend Reinvestment Plan (DRIP) is an equity investment option that allows shareholders’ dividends directly purchase shares of common stock of the paying corporation instead of receiving cash dividends without going via a stock broker. There are three different types of DRIP which are open-market DRIP, new-issue DRIP and combination of open-market and new-issue DRIPs. Open-market DRIP is where the firmuse reinvested dividends to buy its outstanding shares in the open market to satisfy the needs of participating shareholders. New-issue DRIP is where the firm raises capital by selling their authorized but unissued shares or treasury stock...
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...Beginning Literature of Dividends and the Movement towards Repurchases .......3 3.0 Methods of Repurchases and Key Definition ...............................................................4 4.0 The Positives and Negatives on Methods of Repurchases ……....................................5 5.0 Summary and Conclusion ...........................................................................................10 6.0 References.....................................................................................................................11 1.0 Introduction “A share repurchase distributes cash to existing shareholders in exchange for a fraction of the firm's outstanding equity. That is, cash is exchanged for a reduction in the number of shares outstanding.” (Wikipedia Foundation, Inc.) The intent of this paper is to review stock repurchases as the preferred method of alternative payout for shareholders. There are many reasons why firms choose this option. Past literature shows substantial evidence of reasons that range from capital structure adjustments to takeover defense (Bagwell, 1991). However, in my opinion the strongest reason is because stock repurchases can be used as another method of paying out shareholders in the form of a dividend. In recent times, there have been multiple literary publications that proved that repurchasing is a viable option for firms. In the first section of this paper, I will provide a beginning overview of dividends and how stock repurchases...
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...The term ‘dividend policy’ refers to “the practice that management follows in making dividend payout decisions or, in other words, the size and pattern of cash distributions over time to shareholders” (Lease et al., 2000, p.29). This issue of dividend policy is one that has engaged managers since the birth of the modern commercial corporation. Surprisingly then dividend policy remains one of the most contested issues in finance. Dividend policy is concerned with financial policies regarding paying cash dividend in the present or paying an increased dividend at a later stage. Whether to issue dividends and what amount, is determined mainly on the basis of the company's unappropriated profit (excess cash) and influenced by the company's long-term earning power. When cash surplus exists and is not needed by the firm, then management is expected to Payout some or all of those surplus earnings in the form of cash dividends or to repurchase the company's stock through a share buyback program. Management must also choose the form of the dividend distribution, generally as cash dividends or via a share buyback. Various factors may be taken into consideration: where shareholders must pay tax on dividends, firms may elect to retain earnings or to perform a stock buyback, in both cases increasing the value of shares outstanding. Alternatively, some companies will pay "dividends" from stock rather than in cash. Our group have selected 3 journals related to the dividend policy in...
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...Machine Tools Corporation Problem Statement When considering whether or not it is necessary to pay dividend, Eastboro Machine Tools Corporation is facing a problem, i.e. how to provide enough cash to ensure the upcoming aggressive growth in the following years. If dividend is necessarily paid, how much dividend will be paid to benefit the shareholders most in the long run? Situation Analysis After two massive restructurings, the firm seems to get in a quick track to development. Its product “Artificial Workforce” appears to have a bright future. Most of securities analysts are optimistic about the product’s impact on the company. That’s why Campbell took the boldest approach by assuming that the company would grow at a 15% compound rate. However, we have noticed that whether or not the 15% growth rate could be achieved heavily depends on the financial decision and the dividend decision even if the firm has good opportunity to generate satisfactory free cash flow to firm (FCFF). Thus, in order to ensure the maximization of the shareholders’ long-term benefits, Ms. Campbell has to take a close look at how the dividend decision impacts the financial decision and the resultant effects on investment decision and the market values of the entire firm and the equity. As the case indicates, Campbell has five options: Zero-dividend, 40%-dividend, Residual-dividend, stock repurchase and not to matter. In my mind, Campbell’s ultimate target is to guarantee enough cash...
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...ratios and vertical and horizontal analysis in regards to deciphering financial statements. Lastly, we talked about preferred and common stocks are issued, placed as journal entries on financial statements and the paid out in dividends. With these topics we got to see why financial statements are compiled the way they are and it gave us a better understanding of how they work for a company. Each week the understanding is getting greater on financial statements. Financial statements are analyzed by corporations so that they are able to see and identify their strengths and possible weaknesses. Identifying the relationship with the balance sheet and a company’s profit and loss accounting will help in the decision making process on whether to proceed with certain things or to either change or eliminate them all together. External users of a company look at the information on financial statements to decide whether or not they want to invest or issue credit but the company also uses these statements to help make the hard decisions that management needs to build a company with staying power. Through issue of common and preferred stocks we must pace the journal entries on our statements and then we use that information when we are paying out dividends as well. There are multiple ways to analyze financial statements, this week we focused on ratio, vertical and horizontal analysis. In the statement of cash flows net income must be converted from an accrual to a cash basis....
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...to pay out dividends to the firm’sshareholders, or repurchase stock. If Campbell chooses to pay out dividends, she must alsodecide on the amount of the payout and how it would affect the company going forward. Anadditional question is whether the firm should embark on a campaign of corporate-imageadvertising and change its corporate name to reflect its new outlook of being a moretechnological company.When considering whether or not it is necessary to pay dividend to shareholders, EastboroMachine Tools Corporation have a problem, the problem is the correct decision andimplementation of Eastboro's dividend policy. In that it has to decide how to provide enoughcash to ensure the upcoming aggressive growth of 15% compounded in the following years. SITUATION ANALYSIS After two massive restructurings, the firm has established itself as anindustry leader in CAM/CAD technology business. Its product being the “Artificial Workforce”appears to have a bright future. Most of securities analysts are optimistic about the product’simpact on the company. This is why Campbell took the bold approach to assuming that thecompany would grow at a 15% compound rate. For 3 years in a row since 1996, dividends hadexceeded earnings, except in 1999, dividends were decreased to a level below earnings. Despitelosses in 1998 and 2000, small dividend was declared. It has not paid dividend in 2001 althoughit had committed earlier to pay sometime in 2001. DIVIDEND PAYOUT DECISION The dividend decision is part...
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...Payout Policy Analysis Payout policy, or the means by which cash is returned to shareholders via cash dividends or share repurchases, is of critical concern for financial managers because of disagreements between management, investors, and financial academia on optimal policy. Payout policy decisions are often based upon key factors such as industry trends and behavior, decisions of benchmark competitors, and the predictability of future cash flows and sustainability. Linear Technology uses regular quarterly dividends, and share repurchases as opposed to special dividends to maintain their target payout ratio. Finally, Linear appears to smooth dividends with dividend growth as opposed to a traditional residual policy. As proposed by Modigliani and Miller, choices in dividend policy do not have an effect on firm value under the assumptions of fixed capital investment and debt policy. The model is extended to further prove the irrelevance of stock repurchases when adhering to the cash flow constraint. Finally, the concept of homemade dividends whereby an investor can duplicate a desired payout policy by selling or reinvesting shares enforces irrelevance from an investor. Theoretically, the irrelevance of payout policy on firm value should downplay the controversy of such decisions. Thus policy controversy and decisions are often the result of agency problems, signaling, and clientele effects. Applicability of these theories to Linear is discussed in the next section. ...
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...SCHOOL OF MANAGEMENT MASTER IN BUSINESS ADMINISTRATION (MBA) SUBMITTED BY; ROHAN DEEPAK NIKAM ROLL NO. 013096 MBA FINANCE 2 2013-2015 SUBJECT: CORPORATE FINANCE AVAILABILITY OF DIVIDEND POLICY IN CORPORATE SUBMITTED TO: PROF. NEETU SHARMA MBA FINANCE-II MEANING OF DIVIDEND POLICY A dividend refers to that portion of a firm's net earnings which are paid to shareholders. Dividends are paid either in cash or stock. Since dividends are distributed out of the profits, the alternative to the payment of dividends is the retention of earnings. The retained earnings constitute an important source of financing the investment requirements of the firm. There is inverse relationship between retained earnings and cash dividends. More dividends result in smaller retentions where as lesser dividend results in larger retentions. Thus, dividends and retained earnings are competitive and conflicting. Dividend decisions refer to the decisions regarding the division of net earnings to the dividend and retained earnings. A firm can distribute all of its earnings to the shareholders as dividends or can retain all of its earnings for reinvestment as retained earnings or can distribute a part of earnings as dividend and retain the balance for re-investment purpose. Dividend decision is a major financial decision in the sense that a firm has to choose between distributing profits to the shareholders and ploughing back them into the business. The selection would be influenced by the effect...
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...entering into the new field of computer-aided design and computer-aided manufacturing. The company is currently facing a tough decision as to what type of dividend to payout which has been inconsistent for numerous years. Gainesboro Corporation faces three possible dividend polices that is recommended to help the company for the years to come: zero-dividend payout, 40% dividend payout, or residual-dividend payout. In terms of zero-dividend payout, Gainesboro has the ability to use the “extra” cash to plowback to further their CAD/CAM technological advancements, since the firm has decreased their dividends from 66.5% in 1978 to 20.8% in 1999, a zero-dividend payout may not hurt the company as speculated. Second, the 40% dividend payout which always seems favorable would go in-line with the firms past dividends payouts and could even restore confidence for Gainesboro, but could possibly not benefit the company with the uncertainty in their sales and earnings for the years to come. Third, the residual-dividend payout, which states that the firm will only pay when it offers projects that have positive NPV has the potential to build trust with investors, especially with more institutional investors being value-oriented. Gainesboro will only pay dividends with any unused funds from the projects. According to our findings Gainesboro should use a residual-dividend payout due to the fact that the company is going through a lot of changes. In order to keep their heads above water and the...
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...6) Capital Budgeting Cost of Capital Measures of Leverage Dividends and Share Repurchases Working Capital Management Financial Statement Analysis Capital Budgeting Introduction The Capital Budgeting Process is the process of identifying and evaluating capital projects, i.e., projects where the cash flow to the firm will be received over a period longer than a year. Capital budgeting usually involves the calculation of each project’s future accounting profit by period, the cash flow by period, the present value of the cash flows after considering the time value of money, the number of years it takes for a project’s cash flow to pay back the initial cash investment, an assessment of risk, and other factors. 5 Key Principles of Capital Budgeting 1) Decisions are based on cash flows, not accounting income (Incremental cash flows are to be considered, not sunk costs) 2) Cash flows are based on opportunity costs 3) The timing of cash flows is important 4) Cash flows are analyzed on an after-tax basis 5) Financing costs are reflected in the project’s required rate of return Net Present Value (NPV) The NPV is the sum of present values of all expected incremental cash flows if a project is undertaken. The discount rate used is the firm’s cost of capital. For a normal project with an initial cash outflow, flowed by a series of cash inflows (after tax), the NPV is given by:- For independent projects, the NPV decision rule is to accept projects with positive NPVs and to reject...
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...stock value will aid in the decision to recommend Walmart stock as an investment to clients. The valuation of stock is based on estimations of various parameters using various prediction models. Several models are available to aid in estimating stock prices and they are utilized herein. The dividend discount model, future dividends and a terminal value, the three-stage approach and use of P/E ratios are all utilized in this analysis to best determine a buy/hold/sell recommendation for clients. Dividends in Perpetuity The Dividend Discount Model (DDM) is one way to assess the worth of Walmart’s stock price. This model assumes that the current value of Walmart’s stock is the present value of future expected dividends, discounted by the investor’s expected rate of return. A perpetuity is an annuity that has no end, or in other words, a stream of cash payments that continue for an indefinite period of time as seen in Exhibit 1, Figure 1. The perpetuity relationship is stock price is equal to expected dividends divided by the investor’s required rate of return minus the perpetual dividend growth rate as illustrated in Exhibit 1, Equation 1. The input variables needed to calculate the current value of a firm’s stock price are dividend growth, expected dividend, and the investor’s required rate of return. One respected analyst issued a forecast of constant perpetual dividend growth of 5.0 percent. The consensus annual Walmart dividend amount for the next fiscal...
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...Ogden- Chapter 14- Dividend policies and stock repurchases Cash dividends are the two principal means by which a firm pays cash to shareholders. In an ideal market, the result of a dividend payment is that the firms stock price falls by the per share amount of the dividend. Stock Repurchase- the firm uses cash to retire some outstanding shares, buying shares from any investors who choose to dell. In an ideal market, a firms stock repurchases reduce its shares outstanding as well as the firms assets (cash) but have no effect on the market price of the shares Three things you need to determine with dividends 1) Whether the firm should pay a dividend 2) How much the dividend should be 3) What the effect is of a dividend on the market equity value of the firms stock Not as many companies are paying dividends : the phenomenon is due to a change in the characteristics of firms in the market, specifically a shift toward a greater prevalence of firms that have always paid less or no dividends or b) an en mass decision of firms to pay out a smaller proportion of earnings or to pay none at all. Types of firms that have no paid dividends ( small firms and firms with low profitability or strong growth opportunities Are stock repurchases replacing dividends? : increases in repurchases suggest that firms are substituting repurchases for dividends to lower shareholders taxes. The primary effect of repurchases is to increase the already high earnings payouts of...
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...Theories for Dividend Policy and Factors Affecting Dividend Payout A Review of the Literature Prepared for, 11038 Corporate Finance 307 School of Economics and Finance Curtin Business School Curtin University Miri Sarawak Campus Abstract The main objective of this literature review is to highlight the major theories for dividend policy that have been discussed and argued by many researchers over the years. It is aim to helping firms’ management to set their dividend policy and provide additional knowledge to investors. The theoretical aspect is agency theory which has negative relationship between percentages of insiders and ratio of dividend payout. The signaling theory is applicable in the real world but there is no evidence to support changes in dividend payout signaling the current and future performance of the firm. Bird-in-the-hand theory which risk adverse investors prefer receive dividend now instead of sell their shares in future for capital gain and this theory was not agreed by MM. Next is tax preference theory to study whether the level of firm leverage ratio will affect the dividend payout but it is not applicable for Indian firms. Lastly will discuss about how firm size and financial leverage can affect the firms’ dividend payout. In conclusion, since firms are free to choose whether to distribute dividend or retained their earnings, so there are not right or wrong theories and factors for dividend policy. Government regulations on firms and corporate...
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