1. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 15-1

2. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 15-2 Part IV Capital Structure

3. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 15-3 Chapter 15 How Taxes Affect Dividends and Share Repurchases

4. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 15-4 Exhibit 15.1: Dividend and Repurchase Payout Ratios Source: Gustovo Grullon and roni Michaely, 2000. “Dividends, Share Repurchases and the Substitution Hypothesis” Rice University working paper.

5. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 15-5 Exhibit 15.2: Selected Dividend Yields and Payout Ratios, 1993 and 1999 Note: These ratios were calculated with data taken from COMPUSTAT. AT&T Apple Computer Boeing Deere Disney Dow Chemical General Motors Hewlett-Packard McDonalds Microsoft Minnesota Mining & Mfg. Philip Morris Safeway Texaco Wal-Mart Company 19931999 Dividend Yield (%) Payout Ratio (%) Dividend Yield (%) Payout Ratio (%) 2.51% 1.64 2.31 2.70 0.54 4.58 1.46 1.14 0.74 0 3.05 4.67 0 4.94 0.52 44.92% 64.39 27.34 92.74 18.35 110.82 23.36 19.32 13.82 0 56.45 63.91 0 65.84 12.81 1.73% 0 1.35 2.43 0.20 2.60 2.75 0.86 0.48 0 2.29 8.00 0 3.31 0.37 49.72% 0 22.22 85.44 8.25 57.81 22.99 20.78 13.54 0 51.03 57.32 0 84.11 16.00

6. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 15-6 Exhibit 15.3: Chrysler’s Choice: Dividends or Share Repurchase

7. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 15-7 Exhibit 15.4: Tax Consequences: Dividend versus Share Repurchase (in $ millions) Dividend Alternative Dividend Tax rate Immediate tax liability Share Repurchase Alternative Proceeds from sale of 2 million shares Less original cost (at $38/share) Taxable capital gain Tax rate Immediate tax liability $100.0 x 35% $ 35.0 $100.0 - 76.0 $ 24.0 x 20% $ 4.8

8. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 15-8 Exhibit 15.5: After-Tax Cash Flows for a Taxable Investor

9. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 15-9 Exhibit 15.6: Cash Flows for a Tax Exempt Investor