1. 1 Dividend Policy 股利政策

2. 2 Should the firm pay out money to its shareholders? Source of capital: debt, preferred stocks, common stocks, and retained earnings. If we think dividend policy as an issue if capital structure policy, dividend policy is irrelevant.

3. 3 Three issues 1.Describe various kinds of dividends and how dividends and how dividends are paid. 2.Discuss whether dividend policy matters 3.Strategies implement a dividend policy

4. 4 Type of dividends 股利種類 1.regular cash dividends 正常 ( 現金 ) 股利 2.extra dividends 超常股利 3.special dividends 特殊股利 4. Stock Dividends 股票股利 5.liquidating dividends 清算股利

5. 5 Type of dividends 釋例 嘉聰公司每年發放現金股利 1 元，因該公司所處的產業每 四年有一個景氣循環的高峰，公司三年可以分發現金 股利 0.5 元。在第 7 年時，公司因在股巿中賺了不少營 業外投資所得，公司以特別股利型式發放每股 0.8 元給 股東。在第 9 年時，公司想說為追求成長，因而以正常 股利 1 元，加股票股利每股 0.5 元（等於每 100 股配 5 股） 方式發放。到第 10 年時公司卻突然因經營不善宣布倒 閉，清算結果每股可得現金 25 元。

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9. 9 Dividend payment

10. 10 Declaration date: to announce Ex-dividend date: Date four business days before the date of record. Date of record Effect of ex-dividend before ex-date, stock price is $10 is going to pay dividend of $1 per share →after ex-dividend date, stock price is about $9 If there are no frictions in markets, we expect that the value of a share of stock will go down by about the dividend amount when the stock goes ex-dividend.

11. 11 Whether dividend policy matters Dividend policy is the time pattern of dividend payment. Example Two-period, 100 shares, r=10%, ash flows for each period is $10,000. Case 1: dividends pay out per period are set equal to the cash flow of $10,000 the firm value=173.55*100=17,355

12. 12 Alternatively, case 2 Want to pay $110 at period 1 Period 1 period 2 cash flow 10000 10000 dividends 11000 borrow 1000 -1100 11000 8900 ÷ 100 110 89, the same The value of the stock is not affected by the switch in dividend policy. Dividend policy makes no difference.

13. 13 Homemade dividends Assuming the firm choose case 2 dividend policy, but a shareholder prefers 100, 100 for each period. period 1 period 2 dividends 110 89 buy stocks 10 11 net cash flow 100 100 firm case1, a shareholder prefers case 2 period 1 period 2 dividends 110 89 buy stocks 10 -11 net cash flow 100 100

14. 14 Dividends are relevant Dividend policy is irrelevant. Dividend policy by itself can not raise the dividend at one date while keeps it the same at all other dates. Rather, dividend policy merely establishes the trade-off between dividends at one date and dividends at another date. → M&M Dividend Irrelevance Theory

15. 15 股利無關例題二：自行調整收入

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17. 17 The dividend relevant theory

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19. 19 Taxes: Tax Differential Theory 所得稅差異論 Compare: –a: dividend income tax, –b: capital gain tax. If a<b, low dividend payout. For some corporate investors, they have 70% dividends tax-free, and Tax-exempt investors, like pension funds, they all require high dividends.

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22. 22 Gorden: Bird-in-the-hand theory 一鳥在手論 Gorden argues that a high-dividend policy benefits stockholders because it resolves uncertainty. Forecasts of dividends to be received in the distant future have greater uncertainty than do forecasts of near-term dividends. Stock price should be low for those companies that pay small dividends now in order to remit, high,less certain dividends at later dates.

23. 23 Investors prefer larger cash dividends to smaller cash dividends. This conclusion is based on the bird-in-the-hand fallacy. Fallacious argument: Dividends represent cash in hand, whereas reinvesting that cash in the hope of greater dividends in the future is a risky prospect. Hence, shareholders are better off with the dividend. Rebuttal: If cash flows are priced correctly in the market, then the present value of the larger riskier future dividends is equal to the present certain dividend. Any shareholder that decides otherwise can undo the firm's dividend decision.

24. 24 Two special issues 1.Information content of dividends: –The market's reaction to a change in corporate dividend pay out 2.The clientele effect: –Stock attracts particular groups based on dividend yield and the resulting tax effects.

25. 25 The agency cost/contracting model

26. 26 Establish a dividend policy 1.Residual dividend policy –Policy under which a firm pays dividends only after meeting its investment needs while maintaining a desired debt/equity ratio. 2.Dividend stability 3.A compromise dividend policy *avoid cutting back positive NPV projects to pay a dividend *avoid dividends cutting *avoid the needs to sell equity to pay a dividend *maintain D/E ratio *maintain a target dividend payout ratio

27. 27 Residual dividend policy 釋例

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29. 29 Stock repurchase Buttle Wilson and Co. has $50 m. available for distribution. Buttle has 10 m. shares outstanding. It expects to earn $2.50 a share, and the current market value per share is $25. The firm has unused cash that could be used to pay a cash dividend of $5 per share, implying an ex-dividend value of $20 per share. Alternatively, the firm could use the $50 m. to repurchase 2 m. shares ($50,000,000/$25). Following the share repurchase, each share would be worth

30. 30 Following the distribution of the $50 m. whether through a stock repurchase or through a dividend payment, the firm's shares will trade at a P/E ratio of 8 (= $20/$2.50). Under the dividend alternative, the EPS is unchanged at $2.50, because the $50 m. paid out were unused, and the number of shares is unchanged. Each shareholder gets (EPS x P/E = $2.50 x 8 =) $20 + $5 = $25 in total value. Under the share repurchase alternative, the projected EPS is higher at However, shareholder value is (EPS x P/E =) $3.125 x 8 = $25, once again. The higher EPS is exactly offset by the drop in the P/E ratio from ($25/2.5 =) 10 before the stock repurchase to 8 afterwards.

31. 31 Reasons for share repurchase in an imperfect market: VALUE ENHANCING REASONS Tax considerations: Gains to individual shareholders from share repurchases are taxed at the capital gains rate, which is usually smaller than the tax rate on cash dividends. However, a regular policy of repurchasing shares could be disallowed by the IRS for favorable capital gains treatment. Eliminate Small Shareholdings: The cost of servicing a small shareholder account is roughly the same as that of servicing a large shareholder account. Hence repurchasing shares of small stockholders could reduce overall stockholder service costs.

32. 32 Increase Leverage: If the firm wishes to increase debt in its capital structure, it could borrow funds and use the proceeds to repurchases shares or offer it sshareholders the opportunity to exchange their shares for a new debt issue. Exploit Perceived Undervaluation: If a firm's stock is perceived by the management to be undervalued, repurchasing shares at a favorable price could increase the wealth of the firm's remaining shareholders. However, if investors believe that the share repurchase is being undertaken for this purpose, share prices will jump to reflect market belief in a higher share value. If so, the true wealth of the firm's remaining shareholders would not increase; however, the market value of their shareholdings will increase, which can be valuable for shareholders who desire liquidity.

33. 33 VALUE DECREASING REASONS Consolidation of Insider Control: Firms sometimes purchase stock from contentious minority stockholders, sometimes at a premium (greenmail). At other times, they may do so to reduce public float--to reduce the percentage of stock held by persons not affiliated with the insider group. Stock repurchases may also be designed to reduce the attractiveness of the company as an acquisition candidate, thus enhancing management's security. These objectives may not be consistent with firm value maximization.