J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Dividend Policy May 2, 2007 (LA) and May 1, 2007 (OCC)

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Raising Funds in United States u Available funds –Internal funds –Current shareholders –Private sources: banks, private placements –Public Sources: short-term, long-term u Securities Acts of 1933 and 1934 u Investment bankers and costs of funds

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Capital Structure in Practice u Most firms in the U. S. are mainly equity financed despite tax advantage of debt u Most firm financing is internally generated cash in the U. S. u U.S. firms use less debt (Table 16.4, p. 480) u Debt markets –Bank and privately placed debt in Japan, EEC –Public debt markets and banks in U.S.

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Dividend Policy u The dividend decision –Board of directors deliberation –Dividends and investment –Announcement and payment of dividend u Dividends as a source of cash for investors u Tax treatment of dividends –Individuals and other investors –Combination of corporate and individuals u Equilibrium in capital markets

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Summary M-M Debate Issues

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 M-M Dividend Irrelevance u Assume no taxation and efficient markets u Stockholders can create cash flows equivalent to dividends by selling shares u Shareholders not needing cash can reinvest dividends in stock u Reinvested earnings (not paid as dividends) grow at firm’s rate of return and produce gains u New equity dilutes old claims on income

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Investment and Dividends u Firms should invest in all NPV>0 projects u Investment determines a firm’s value: u Value of firm (with or without debt) depends on the value from investments u Cash dividends increase need for new equity

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Dividend Debate u Taxation issues (past and current) u Information in dividends –Cash payment signals real cash flows –Smoothing implies information on future cash u Tax effects may be offset –Clientele effects –Miller-Scholes strategies can eliminate problem u Evidence

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Course Summary and Review

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Corporate Financial Decisions u Investments –Long-term strategic commitments of capital –Tangible and intangible, projects or companies u Financing –Debt or equity –Term, conditions, commitments u Working Capital –Cash –Inventory and accounts receivable –Short-term borrowing and accounts payable

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Corporate Finance Questions u What determines asset values and how do interest rates and expectations affect them? u Which projects should we invest in? u Which risks are important for investors? u How can we measure and adjust for risk? u Does a firm’s financing or dividend policy matter?

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Determinants of Value u Cash, Time, Risk determine value u Present value analysis deals with the effect of time or timing on value u Cash flow estimation is the subject of the next part of the course (classes 5 to 8) u Risk is incorporated in the discount rate that we discuss in Part 3 of the course u Positive net present value projects create value for investors

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Required Rates of Return u Investors require compensation for systematic risk u If expected returns from a project or an asset is higher than the required rate, it has positive net present value u Equivalently, its internal rate of return is higher than the opportunity rate u Security market line is relation between systematic risk and required rates in CAPM

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Rigor implies Mathematics u Multi-period expressions with factors raised to powers (present value calculations in Chapter 4) »Polynomial functions mean non-linear relations »Sometimes more than one way to solve a problem u Arithmetic, but in large doses (projections in Chapter 7) »Addition and subtraction, ratios (division) and muliplication, »Many calculations, not difficult calculations u Statistical concepts like correlation (analysis of risk in Chapters 10 and 12) u Algebra using equations and unknowns (theory of capital structure in Chapter 15)

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Main Analytical Material in Corporate Finance u Chapters 4 and 5 - Present value and valuation of stocks and bonds u Chapter 7 - Investment project evaluation u Chapters 9, 10 and 12 - Portfolio theory, CAPM, and capital budgeting with risk u Chapter 13 - Efficient markets u Chapters 15, 16, and 18 - M-M theories and debate on capital structure and dividends

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Optional Review Materials u Summary of Finance Principles Every MBA Should Know posted on website u Compilation of Objectives, Important Vocabulary, and Wall Street Journal Articles u Old final and midterm examinations

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Important WSJ Stories 2007 u Challenges facing auto industry in restructuring u Increasing role of private-equity firms in corporate restructuring, including in GM and Chrysler cases u Private-equity firms going public u Costs of SOX compliance continues to be a major issue u SEC and press focus on executive compensation

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 GSBA 548, Finance & the Future u First goal: prepare students to deal with an environment where finance professionals partially determine the environment –Finance is a branch of rhetoric –The are no right answers but there are coherent and persuasive answers u Second goal: induce sympathy for the financial view of the world

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Finance View of the World u Your personal world –Return on your investments, including human capital –Approach to personal financial management u The real world –Corporate governance: goals of policy, relation of policy to efficiency –Dynamism and complexity of financial markets

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Current Developments in Finance u Deepening of consumer financial services markets similar to deepening of wholesale markets u Refinement of market allocation of risks and returns, making markets more efficient u Changes in demand and supply of equity and debt and issues in valuation of residual and fixed claims u Technology, globalization, deregulation

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Final Examination u Open book, open note, 6:00-8:30pm u Calculator, #2 pencil, and pen u 25 multiple choice and 3 long answer u 1/3 covers first half of course, 2/3 last half u Questions from course objectives, important vocabulary, end-of-chapter problems, class exercises, and group project u Review sessions with TAs and instructor

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Likely Questions u Major material from key chapters not covered extensively in midterm examination u Hardest questions on midterm considered straightforward by instructor u Applications of problem-solving of basic finance principles covered extensively in class

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007 Good Luck!! u Teaching assistants and I want you to do well on the final and group project u We are not trying to tell you how to study for the final but want to make everything you might need available in a convenient format u We hope to see you in finance classes in the future