dividend policy and internal financing

2. Learning Objectives Describe the tradeoff between paying dividends and retaining the profits within the company. Explain the relationship between a corporation�s dividend policy and the market price of its common stock. Describe practical considerations that may be important to the firm�s dividend policy. Distinguish between the types of dividend policy corporations frequently use. Specify the procedures a company follows in administering the dividend payment. Describe why and how firm might choose to pay non-cash dividends (stock dividends and stock splits) instead of cash dividends. Explain the purpose and procedures related to stock repurchases.

3. Dividend Policy and Internal Financing

4. Dividend Policy and Internal Financing A firm calculates and reports Earnings per Share

5. Dividend Policy and Internal Financing A firm calculates and reports earn Earnings per Share Management will reinvest part of earnings per share in the company and pay part as dividend

6. Dividend Policy and Internal Financing A firm calculates and reports earn Earnings per Share Management will reinvest part of earnings per share in the company and pay part as dividend

7. Dividend Policy and Internal Financing Stockholders earn Earnings per Share Management will reinvest part of earnings per share in the company and pay part as dividend

8. Dividend Policy and Internal Financing Stockholders earn Earnings per Share Management will reinvest part of earnings per share in the company and pay part as dividend

9. Dividend Policy and Internal Financing Stockholders earn Earnings per Share Management will reinvest part of earnings per share in the company and pay part as dividend

10. Dividend Policy and Internal Financing Stockholders earn Earnings per Share Management will reinvest part of earnings per share in the company and pay part as dividend

11. Dividend Policy and Internal Financing Stockholders earn Earnings per Share Management will reinvest part of earnings per share in the company and pay part as dividend

12. Can Dividend Policy Affect Share Price Three Theories of Dividends Irrelevance Dividends Increase Stock Price Dividends Decrease Stock Price

13. Can Dividend Policy Affect Share Price

14. Can Dividend Policy Affect Share Price

15. Can Dividend Policy Affect Share Price

16. Can Dividend Policy Affect Share Price

17. Can Dividend Policy Affect Share Price

18. Can Dividend Policy Affect Share Price

19. Can Dividend Policy Affect Share Price

20. Can Dividend Policy Affect Share Price

21. Can Dividend Policy Affect Share Price

22. Can Dividend Policy Affect Share Price

23. Can Dividend Policy Affect Share Price

24. Can Dividend Policy Affect Share Price

25. Can Dividend Policy Affect Share Price

26. Can Dividend Policy Affect Share Price

27. Residual Dividend Theory

28. Residual Dividend Theory

29. Residual Dividend Theory Residual Dividend Method Accept all investments with positive net present values

30. Residual Dividend Theory Residual Dividend Method Accept all investments with positive net present values Use retained earnings to finance investments to the extent possible

31. Residual Dividend Theory Residual Dividend Method Accept all investments with positive net present values Use retained earnings to finance investments to the extent possible If earnings left over after making investments, pay a dividend with the residual

32. Residual Dividend Theory Residual Dividend Method Accept all investments with positive net present values Use retained earnings to finance investments when possible If retained earnings left over after making investments, pay a dividend with the residual If there are no residual funds, pay no dividend

33. Residual Dividend Theory Residual Dividend Method Accept all investments with positive net present values Use retained earnings to finance investments when possible If retained earnings left over after making investments, pay a dividend with the residual If there are no residual funds, pay no dividend

34. The Clientele Effect There are all kinds of investors, some like dividends, others do not. According to clientele effect, investors who prefer dividends over capital gains will gravitate to high dividend paying firms. Others will choose to invest in no or low dividend paying firms. As an investor�s circumstances and or outlook for dividends changes, he will sell one kind of shares to invest in another kind.

35. The Information Effect

36. The Information Effect

37. The Information Effect

38. Drop Agency Costs

39. Expectations Theory

40. Expectations Theory

41. Expectations Theory

42. Expectations Theory

43. Expectations Theory

44. Expectations Theory

45. Expectations Theory

46. Expectations Theory

47. Expectations Theory

48. Expectations Theory

49. Expectations Theory

50. Summary of Dividend Theories Tests of dividend policy have not found conclusively that dividends affect stock price The majority of managers believe that dividend policy is important There are tax disadvantages to paying dividends Almost all companies pay regular dividends Dividend Policy is a "puzzle" to academic researchers

51. Dividends in Practice There may be legal restrictions on dividends State laws have restrictions on dividends if company is not financially sound Bond and Preferred Stock contracts may restrict dividends Liquidity Position The firm must have sufficient cash to pay the dividend Sources of Financing Small firms may be able to easily raise money in the capital markets so they will have low dividends Earnings Predictability Firms with stable earnings typically pays higher dividends as it expects to have future profits needed to pay dividend

52. Alternative Dividend Policies

53. Alternative Dividend Policies

54. Alternative Dividend Policies

55. Alternative Dividend Policies

56. Alternative Dividend Policies

57. Alternative Dividend Policies

58. Alternative Dividend Policies

59. Alternative Dividend Policies

60. Alternative Dividend Policies

61. Alternative Dividend Policies

62. Alternative Dividend Policies

63. Alternative Dividend Policies Constant Dividend Payout Stable Dollar Dividend Small regular dividend plus year-end extra payment Regular dividend is small, if earnings permit pay an extra dividend at end of year

64. Alternative Dividend Policies Constant Dividend Payout Stable Dollar Dividend Small regular dividend plus year-end extra payment Regular dividend is small, if earnings permit pay an extra dividend at end of year Most popular method is the Stable Dollar Dividend

65. Dividend Payment Procedures

66. Dividend Payment Procedures Example On August 25, 2004 Southside Bankshares announced a quarterly dividend of $1 per share to be paid to share holders on record September 9, 2004, payable September 15, 1995

67. Dividend Payment Procedures Example On August 25, 2004 Southside Bankshares announced a quarterly dividend of $1 per share to be paid to share holders on record September 9, 2004, payable September 15, 1995

68. Dividend Payment Procedures Example On August 25, 1995 Southside Bankshares announced a quarterly dividend of $1 per share to be paid to share holders on record September 9, 1995, payable September 15, 1995

69. Dividend Payment Procedures Example On August 25, 2004 Southside Bankshares announced a quarterly dividend of $1 per share to be paid to share holders on record September 9, 2004, payable September 15, 2004.

70. Dividend Payment Procedures Example On August 25, 2004 Southside Bankshares announced a quarterly dividend of $1 per share to be paid to share holders on record September 9, 2004, payable September 15, 2004

71. Dividend Payment Procedures Example On August 25, 2004 Southside Bankshares announced a quarterly dividend of $1 per share to be paid to share holders on record September 9, 2004, payable September 15, 2004

72. Stock Dividends and Splits

73. Stock Dividends and Splits

74. Stock Dividends and Splits

75. Stock Dividends and Splits

76. Stock Dividends and Splits

77. Stock Dividends and Splits

78. Rationale for Stock Split or Dividend Example Katie Corporation announces a 50% stock split. Before the split Katie has 100,000 shares of stock outstanding at a price of $50 per share.

79. Rationale for Stock Split or Dividend Example Katie Corporation announces a 50% stock split. Before the split Katie has 100,000 shares of stock outstanding at a price of $50 per share.

80. Rationale for Stock Split or Dividend Example Katie Corporation announces a 50% stock split. Before the split Katie has 100,000 shares of stock outstanding at a price of $50 per share.

81. Rationale for Stock Split or Dividend Example Katie Corporation announces a 50% stock split. Before the split Katie has 100,000 shares of stock outstanding at a price of $50 per share.

82. Rationale for Stock Split or Dividend Example Katie Corporation announces a 50% stock dividend. Before the dividend Katie has 100,000 shares of stock outstanding at a price of $50 per share.

83. Rationale for Stock Split or Dividend Example Katie Corporation announces a 50% stock split. Before the split Katie has 100,000 shares of stock outstanding at a price of $50 per share.

84. Rationale for Stock Split or Dividend Optimal Price Range Some managers believe stock price should not be too high an will split the stock or reduce the dividend to reduce the price Information Stock splits and dividends are seen as a signal that the company is growing Cash Dividend Substitute Companies who do not have cash available to pay a regular dividend may issue a stock dividend instead

85. Stock Repurchases Repurchase as an alternative to dividend Investors who sell shares receive cash -- must pay taxes on any capital gain. Investors who do not want cash simple do not sell shares Company pays excess cash to stockholders. Repurchase as a financing method Firm may issue debt and then repurchase stock This would result in a higher debt ratio Repurchase as an investment decision If management thinks that their stock price is too low, may buy back its own stock

86. Stock Repurchase Procedure Market Purchase Firm buys its own shares through a broker at the market price.

87. Stock Repurchase Procedure Market Purchase Firm buys its own shares through a broker at the market price. Tender Offer Company announces it will repurchase shares at a fixed price.

88. Stock Repurchase Procedure Market Purchase Firm buys its own shares through a broker at the market price. Tender Offer Company announces it will repurchase shares at a fixed price. Negotiated Offer Company negotiates buying stock from specific group of stockholders. Often done to buy out dissident shareholders.

89. Stock Repurchase Procedure Market Purchase Firm buys its own shares through a broker at the market price. Tender Offer Company announces it will repurchase shares at a fixed price. Negotiated Offer Company negotiates buying stock from specific group of stockholders. Often done to buy out dissident shareholders.