上海交通大学：《公司金融学 Corporate Finance》课程教学资源（英文课件）07 Dividend Policy

Chapter 7 Dividend Policy

Chapter 7 Chapter 7 Dividend Policy Dividend Policy

Why Dividend Policy is important? Dividend:a cash distribution of earning Types of Dividends Cash dividends,Stock dividend,Stock split Dividend policy will determines: 1. What funds flow to investor 2. What funds are retained by the firm for reinvestment 3. Information concerning firm performance slide 1

slide 1 Why Dividend Policy is important? Why Dividend Policy is important? ƒ Dividend: a cash distribution of earning ƒ Types of Dividends Cash dividends, Stock dividend, Stock split Cash dividends, Stock dividend, Stock split ƒ Dividend policy will determines: 1. What funds flow to investor What funds flow to investor 2. What funds are retained by the firm for reinvestment What funds are retained by the firm for reinvestment 3. Information concerning firm performance Information concerning firm performance

Key Questions Can the payment of cash dividends affect shareholder wealth? If so,what dividend-payout ratio will maximize shareholder wealth? slide 2

slide 2 Key Questions Key Questions ƒ Can the payment of cash dividends Can the payment of cash dividends affect shareholder wealth? affect shareholder wealth? ƒ If so, what dividend If so, what dividend -payout ratio payout ratio will maximize shareholder wealth? will maximize shareholder wealth?

Topics to be Discussed -The irrelevance of Dividend Policies in a world of perfect capital markets Dividend Policy in a real world Dividend Stability ■ Stock Repurchase ■ Stock Dividends and Stock Splits Summary slide 3

slide 3 Topics to be Discussed Topics to be Discussed ƒ The irrelevance of Dividend Policies in a world of perfect capital markets ƒ Dividend Policy in a real world ƒ Dividend Stability ƒ Stock Repurchase ƒ Stock Dividends and Stock Splits ƒ Summary

The irrelevance of Dividend Policy Assumption 1.Perfect market 2.Homogeneous expectation 3.The investment is not altered by changes in dividend policy slide 4

slide 4 The irrelevance of Dividend Policy The irrelevance of Dividend Policy ƒ Assumption 1. Perfect market 2. Homogeneous expectation 3. The investment is not altered by changes in dividend policy

Irrelevance of Dividends A.Current dividends versus retention of earnings M&M contend that the effect of dividend payments on shareholder wealth is exactly offset by other means of financing. *Miller.M.,and F.Modigliani,"Dividend Policy,Growth and the Valuation of Shares,"Journal of Business(October 1961). *Fama,E.and K.French,"Disappearing Dividends:Changing Firm Characteristics or Lower Propensity to Pay?"Journal of Financial Economics(April 2001). The dividend plus the "new"stock price after dilution exactly equals the stock price prior to the dividend distribution. slide 5

slide 5 Irrelevance of Dividends Irrelevance of Dividends ƒ M&M contend that the effect of dividend payments on shareholder wealth is exactly offset by other means of financing. *Miller .M., and F. Modigliani, “Dividend Policy, Growth and the Valuation of Shares,” Journal of Business (October 1961). * Fama, E. and K. French, "Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?” Journal of Financial Economics (April 2001). ƒ The dividend plus the “new” stock price after dilution dilution exactly equals the stock price prior to the dividend distribution. A. Current dividends versus retention A. Current dividends versus retention of earnings of earnings

Price Behavior around the Ex-Dividend Date In a perfect world,the stock price will fall by the amount of the dividend on the ex-dividend date. -t…-2 +1 +2 The price drops Ex-dividend by the amount Date of the cash dividend slide 6

slide 6 Price Behavior around the Ex Price Behavior around the Ex -Dividend Date Dividend Date ƒ In a perfect world, the stock price will fall by the amount of the dividend on the ex-dividend date. $ P $P - div Ex-dividend Date The price drops by the amount of the cash dividend - t … -2 -1 0 +1 +2 …

Irrelevance of Dividends B.Conservation of value M&M and the total-value principle ensures that the sum of market value plus current dividends of two firms identical in all respects other than dividend-payout ratios will be the same. Investors can "create"any dividend policy they desire by selling shares when the the dividend payout is too low or buying shares when the dividend payout is excessive. slide 7

slide 7 Irrelevance of Dividends Irrelevance of Dividends ƒ M&M and the total-value principle ensures that the sum of market value plus current dividends of two firms identical in all respects other than dividend-payout ratios will be the same. ƒ Investors can “create” any dividend policy they desire by selling shares when the the dividend payout is too low or buying shares when the dividend payout is excessive. B. Conservation of value B. Conservation of value

Example Wharton company is an all-equity firm.The manager know at the present time (date 0) that the firm will dissolve in one year(date 1) The firm will receive a cash flow of $10,000 immediately and another $10,000 next year. There is no additional positive NPV projects available(r=10%,share outstanding=1000) slide 8

slide 8 Example Example Wharton company is an all-equity firm. The manager know at the present time (date 0) that the firm will dissolve in one year(date 1). The firm will receive a cash flow of $10,000 immediately and another $10,000 next year. There is no additional positive NPV projects available (rs=10%, share outstanding=1000)

Condition1:Div at each date are equal to the cash flow Vo Divo Divi/(1+r) Value of the firm =10,000+10,000/(1+10%)=19,090.91 Value per share=10+10/(1+10%)=19.09 Price after ex-dividend date =19.09-10=9.09 slide 9

slide 9 Condition1: Div at each date are Condition1: Div at each date are equal to the cash flow equal to the cash flow V 0 = Div 0 + Div 1/(1+r) Value of the firm =10,000+10,000/(1+10%)=19,090.91 Value per share = 10 +10/(1+10%) = 19.09 Price after ex-dividend date = 19.09 –10 = 9.09