DIVIDEND POLICY AND STOCK REPURCHASES

Topics: Stock market, Dividend, Stock Pages: 10 (2014 words) Published: April 28, 2015

MBA PROGRAMME

MASTER OF BUSINESS ADMINISTRATION
Graduate School of Business
Universiti Kebangsaan Malaysia

GROUP PRESENTATION
CLASS: Corporate Finance
LECTURER: Prof. Dr Fauzias Mat Nor

DIVIDEND POLICY AND STOCK REPURCHASES

TEAM MEMBERS:
NO.
NAME
I.C. NO.
STUDENT NO.
1.
Mohd Hatta Ahmad
641225-05-5601
ZP00664
2.
Azizul Azrin Mahmor
761117-04-5189
ZP00580
3.
Hazri Zan Abu Kassim

ZP00398
4.
Fazriman Fazli Othman

ZP00665

Date: 10.10.11
INTRODUCTION
Dividends and stock repurchases are firm’s payout policy where a firm pay cash to shareholders

Dividend Policy
Dividend policy is a decision to pay out earnings versus retaining them. Dividend policy issues include pay or not to pay, high or low dividend, stable or irregular dividends, how frequent to pay dividends dan effect on the market equity value of a firm’s stock Stock Repurchases

Stock repurchases are firm’s buying own stock back from the stock holders. Reasons for repurchase :-
Alternative to distributing cash as dividend
To dispose of one-time cash from an asset sale
To make large capital structure change

For illustration, consider if a firm distributes the $100,000 as a cash dividend, the balance sheet will look like this:

In An Ideal Market :-
Stock repurchases reduce a firm’s outstanding shares but no effect on the market prices of the shares. If they distribute the $100,000 through a stock repurchase, the balance sheet will look like this:

THE IRRELEVANCE OF DIVIDENDS AND STOCK REPURCHASES IN IDEAL CAPITAL MARKET Irrelevance Theory was developed by Modigliani & Miller (M & M)where Investors are indifferent between dividends and retention-generated capital gains. Investors can create their own dividend policy; If they want cash, they can sell stock BUT If they don’t want cash, they can use dividends to buy more stock. Implication: Any DIVIDEND payout policy is OK.

M&M stated that the value of a firm is dependent on the cash flow that is generated by the firm’s assets. Thus it is the firm’s investment policy that creates the firm’s value. As a result, inperfect and frictionless capital markets, dividend policy (how the cash is paid out) is not relevant in determining the firm’s value. In ideal capital market, dividend policy is irrelevant as long as the firm’s capital investments and debt policy are fixed.

Investment in a Project
No Dividend – Sell combination of debt and equity securities

Including Dividend payment – Sell combination of debt and equity securities plus the dividend payment

EMPERICAL PERSPECTIVES ON COMPOSITE CASH FLOWS IN RELATION TO CASH DIVIDENDS AND STOCK REPURCHASES Statistics and emperical evidences show that stock repurchases are replacing cash dividend. Firms paying dividends and conducting stock repurchases (Reference : Seasoned Public U.S Nonfinancial Firms 1980 -2000 Source Standard & Poor) are shown below: -

Reasons of Dividend Declined
Transaction costs for selling stocks have fallen down
Managers have increased their holding of stock options
Dividends may less essential as a tool of corporate governance

TYPES OF DIVIDEND
Firms pay dividends in cash or additional stock where the most common cash dividend is the regular quarterly cash dividend. Occasionally, firm pays extra or special cash dividend. Stock dividend involve a larger percentage distribution of additional stock are called stock splits A firm’s management must make its decision on cash decision on cash dividends within the context of overall equity management. The practical effects of dividends on firm’s equity are: Dividend reduce the amount of internal equity available for future investments Dividend increase the probability that the firm will have to sell new equity if new investments should be funded with equity Dividends increase the firm’s leverage, if the firm has debt

DIVIDENDS VERSUS EARNINGS: THE SMOOTHING PHENOMENON
Lintner’s Dividend Smoothing Model...
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