j. k. dietrich - gsba 548 – mba.pm spring 2007 dividend policy may 2, 2007 (la) and may 1, 2007...

J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007

Dividend Policy

May 2, 2007 (LA)

and May 1, 2007 (OCC)


Raising Funds in United States

Available funds– Internal funds– Current shareholders– Private sources: banks, private placements– Public Sources: short-term, long-term

Securities Acts of 1933 and 1934 Investment bankers and costs of funds


Capital Structure in Practice

Most firms in the U. S. are mainly equity financed despite tax advantage of debt

Most firm financing is internally generated cash in the U. S.

U.S. firms use less debt (Table 16.4, p. 480) Debt markets

– Bank and privately placed debt in Japan, EEC– Public debt markets and banks in U.S.


Dividend Policy The dividend decision

– Board of directors deliberation– Dividends and investment– Announcement and payment of dividend

Dividends as a source of cash for investors Tax treatment of dividends

– Individuals and other investors– Combination of corporate and individuals

Equilibrium in capital markets


Summary M-M Debate Issues M-M ISSUES STATE

OF DEBATE CAPITAL STRUCTURE IRRELEVANT

(1) TAXES (2) BANKRUPTCY (3) AGENCY (4) EQUILIBRIUM

TRADEOFFS

DIVIDENDS IRRELEVANT

(1) INFORMATION (2) TAXES (3) MILLER-SCHOLES

EVIDENCE


M-M Dividend Irrelevance Assume no taxation and efficient markets Stockholders can create cash flows

equivalent to dividends by selling shares Shareholders not needing cash can reinvest

dividends in stock Reinvested earnings (not paid as dividends)

grow at firm’s rate of return and produce gains

New equity dilutes old claims on income


Investment and Dividends

Firms should invest in all NPV>0 projects Investment determines a firm’s value:

Value of firm (with or without debt) depends on the value from investments

Cash dividends increase need for new equity

Investment Income Dividends New Equity


Dividend Debate Taxation issues (past and current) Information in dividends

– Cash payment signals real cash flows– Smoothing implies information on future cash

Tax effects may be offset– Clientele effects– Miller-Scholes strategies can eliminate problem

Evidence


Course Summary and Review


Corporate Financial Decisions Investments

– Long-term strategic commitments of capital– Tangible and intangible, projects or companies

Financing– Debt or equity– Term, conditions, commitments

Working Capital– Cash– Inventory and accounts receivable– Short-term borrowing and accounts payable


Corporate Finance Questions

What determines asset values and how do interest rates and expectations affect them?

Which projects should we invest in? Which risks are important for investors? How can we measure and adjust for risk? Does a firm’s financing or dividend policy

matter?


Determinants of Value Cash, Time, Risk determine value Present value analysis deals with the effect

of time or timing on value Cash flow estimation is the subject of the

next part of the course (classes 5 to 8) Risk is incorporated in the discount rate

that we discuss in Part 3 of the course Positive net present value projects create

value for investors


Required Rates of Return Investors require compensation for

systematic risk If expected returns from a project or an

asset is higher than the required rate, it has positive net present value

Equivalently, its internal rate of return is higher than the opportunity rate

Security market line is relation between systematic risk and required rates in CAPM


Rigor implies Mathematics Multi-period expressions with factors raised to

powers (present value calculations in Chapter 4)» Polynomial functions mean non-linear relations» Sometimes more than one way to solve a problem

Arithmetic, but in large doses (projections in Chapter 7)

» Addition and subtraction, ratios (division) and muliplication, » Many calculations, not difficult calculations

Statistical concepts like correlation (analysis of risk in Chapters 10 and 12)

Algebra using equations and unknowns (theory of capital structure in Chapter 15)


Main Analytical Material in Corporate Finance

Chapters 4 and 5 - Present value and valuation of stocks and bonds

Chapter 7 - Investment project evaluation Chapters 9, 10 and 12 - Portfolio theory,

CAPM, and capital budgeting with risk Chapter 13 - Efficient markets Chapters 15, 16, and 18 - M-M theories and

debate on capital structure and dividends


Optional Review Materials

Summary of Finance Principles Every MBA Should Know posted on website

Compilation of Objectives, Important Vocabulary, and Wall Street Journal Articles

Old final and midterm examinations


Important WSJ Stories 2007 Challenges facing auto industry in restructuring Increasing role of private-equity firms in

corporate restructuring, including in GM and Chrysler cases

Private-equity firms going public Costs of SOX compliance continues to be a

major issue SEC and press focus on executive

compensation


GSBA 548, Finance & the Future

First goal: prepare students to deal with an environment where finance professionals partially determine the environment– Finance is a branch of rhetoric– The are no right answers but there are coherent

and persuasive answers Second goal: induce sympathy for the

financial view of the world


Finance View of the World

Your personal world– Return on your investments, including human

capital– Approach to personal financial management

The real world– Corporate governance: goals of policy, relation

of policy to efficiency– Dynamism and complexity of financial markets


Current Developments in Finance

Deepening of consumer financial services markets similar to deepening of wholesale markets

Refinement of market allocation of risks and returns, making markets more efficient

Changes in demand and supply of equity and debt and issues in valuation of residual and fixed claims

Technology, globalization, deregulation


Final Examination

Open book, open note, 6:00-8:30pm Calculator, #2 pencil, and pen 25 multiple choice and 3 long answer 1/3 covers first half of course, 2/3 last half Questions from course objectives, important

vocabulary, end-of-chapter problems, class exercises, and group project

Review sessions with TAs and instructor


Likely Questions

Major material from key chapters not covered extensively in midterm examination

Hardest questions on midterm considered straightforward by instructor

Applications of problem-solving of basic finance principles covered extensively in class


Good Luck!!

Teaching assistants and I want you to do well on the final and group project

We are not trying to tell you how to study for the final but want to make everything you might need available in a convenient format

We hope to see you in finance classes in the future

j. k. dietrich - gsba 548 – mba.pm spring 2007 dividend policy may 2, 2007 (la) and may 1, 2007...

Documents

commitments u

practice u

dividends u firms

dividend policy u

u value of firm

dividend irrelevance

investments u cash dividends

determinants of value