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Intel Case Study

In: Business and Management

Submitted By mathieu1511
Words 3137
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ESPEL Pierre
MATHIEU Jean-Charles
PIQUEMAL Brice

Investment analysis & Financing Decisions

Intel Corporation, 1992

A. Guembel

What factors in general do you think should determine a firm’s payout policy? Explain briefly for each factor how and why you think it should affect payout policy?

- Payout Policy

Net income has only two possible assignments: either reinvestment in the company in the form of cash flow or distribution to shareholders in the form of dividends or share repurchases. What are the factors that determine the dividend policy of a company?

- Basic principle : self-financing.

It is a financial principle that a company must ensure its development through self-financing , ie financing its projects by past performance in reserve . This position is in the interest of managers, creditors and indirectly to the shareholders.
The self-financing must be translated for shareholders by increasing the value of their shares, and therefore by capital gains. However, capital gains are taxed less heavily than dividends in many tax systems, we will define the preferences of investors through the clientele effect. The danger of an excessive self-financing is to cut the relation with financial markets , thus reducing the mobility of capital and investment opportunities. The company creates an internal capital market so the rate of return may be lower and misallocated resources.

- Modigliani-Miller’s theorem:

Unlike the theory of " Bird in the hand " which states that investors prefer the certainty of dividend payments to the possibilities of substantially higher capital gains, Modigliani and Miller (1961) show that shareholders are indifferent to the dividend policy adopted by the company in a perfect market , where dividends are taxed at the same rate as capital gains :
"The total market value of the company is not dependent on its

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