This document summarizes the key aspects of payout policy discussed in Chapter 14 of a finance textbook. It outlines the learning goals, basic elements, and mechanics of payout policy. It discusses dividends, share repurchases, and their tax treatment. It also covers the residual theory of dividends, arguments regarding dividend relevance and irrelevance, and the three basic types of dividend policies. Overall, the document provides an overview of the major topics in corporate payout policy.
Understand the role that financial institutions play in managerial
finance. Contrast the functions of financial institutions and financial markets.
Describe the differences between the capital markets and the
money markets.Discuss business taxes and their importance in financial decisions.
Understand the role that financial institutions play in managerial
finance. Contrast the functions of financial institutions and financial markets.
Describe the differences between the capital markets and the
money markets.Discuss business taxes and their importance in financial decisions.
Chapter 1 Introduction to Financial ManagementSafeer Raza
Chapter 1 of Financial Management by Van horn
Introduction to Financial management
Topics
Introduction
What is Financial Management
Investment Decision
Financing decision
Asset management Decision
Goal of the firm
Value creation or profit maximization
wealth maximization
Agency problems
Corporate Social Responsibility
Corporate governance
Organization of the financial management function
Chapter 1 Introduction to Financial ManagementSafeer Raza
Chapter 1 of Financial Management by Van horn
Introduction to Financial management
Topics
Introduction
What is Financial Management
Investment Decision
Financing decision
Asset management Decision
Goal of the firm
Value creation or profit maximization
wealth maximization
Agency problems
Corporate Social Responsibility
Corporate governance
Organization of the financial management function
Some of the major different theories of dividend in financial management are as follows: 1. Walter’s model 2. Gordon’s model 3. Modigliani and Miller’s hypothesis.
On the relationship between dividend and the value of the firm different theories have been advanced.
he financing decision is a strategic process that involves evaluating different sources of capital, considering their costs and risks, and determining the optimal mix to achieve the company's financial objectives.
Overview of Corporate Finance in India a presentationfootydigarse
Slide 1: Introduction
Welcome to the presentation on Corporate Finance in India.
Overview of the financial landscape and key aspects of corporate finance.
Slide 2: Importance of Corporate Finance
Explanation of why corporate finance is vital for businesses.
Role in maximizing shareholder value, strategic decision-making, and capital allocation.
Slide 3: Financial Markets in India
Overview of India's financial markets: stock exchanges, bond markets, money markets.
Regulatory bodies such as SEBI (Securities and Exchange Board of India).
Slide 4: Sources of Corporate Finance
Equity financing: IPOs, rights issues, private placements.
Debt financing: bank loans, corporate bonds, debentures.
Hybrid instruments: convertible bonds, preference shares.
Slide 5: Capital Structure Decisions
Explanation of capital structure and its importance.
Factors influencing capital structure decisions.
Trade-off between debt and equity financing.
Slide 6: Valuation Methods
Common valuation methods in India: Discounted Cash Flow (DCF), Comparable Company Analysis (CCA), Precedent Transactions Analysis.
Importance of accurate valuation for investment decisions.
Slide 7: Corporate Governance
Overview of corporate governance principles in India.
Role of the board of directors, transparency, and accountability.
Slide 8: Risk Management
Types of financial risks faced by Indian corporations: market risk, credit risk, operational risk.
Risk management strategies: hedging, diversification, insurance.
Slide 9: Mergers and Acquisitions (M&A)
Trends in M&A activity in India.
Motivations behind M&A transactions.
Regulatory framework and approval process.
Slide 10: Case Studies
Analysis of notable corporate finance transactions in India.
Learnings from successful and unsuccessful deals.
Slide 11: Future Outlook
Emerging trends and opportunities in Indian corporate finance.
Potential challenges and how to address them.
Slide 12: Conclusion
Recap of key points covered in the presentation.
Importance of effective corporate finance management for sustainable growth.
Slide 13: Questions and Discussion
Open the floor for questions and discussion.
1. PAYOUT POLICY
CHAPTER 14 - GITMAN
GROUP #5:
• ARY GINTING
• ELI ERMAWATI
• EVI RISMAULI
• YENI FAJRIN
2. LEARNING GOALS
Understand cash payout procedures, their tax treatment, and the
role of dividend reinvestment plans.
Describe the residual theory of dividends and the key arguments
with regard to dividend irrelevance and relevance.
Discuss the key factors involved in establishing a dividend policy.
Review and evaluate the three basic types of dividend policies.
Evaluate stock dividends from accounting, shareholder, and
company points of view.
Explain stock splits and the firm’s motivation for undertaking them.
3. THE BASIC OF PAYOUT POLICY
• The term payout policy refers to the decisions
that firms make about whether to distribute
cash to shareholders, how much cash to
distribute, and by what means the cash
should be distributed
4. ELEMENTS OF PAYOUT POLICY
Dividends are not the only means by which firms
can distribute cash to shareholders. Firms can
also conduct share repurchases, in which they
typically buy back some of their outstanding
common stock through purchases in the open
market.
5. ELEMENTS OF PAYOUT POLICY
If we generalize the lessons about payout policy, we may expect the
following to be true:
• Rapidly growing firms generally do not pay out cash to
shareholders.
• Slowing growth, positive cash flow generation, and favorable tax
conditions can prompt firms to initiate cash payouts to investors.
The ownership base of the company can also be an important
factor in the decision to distribute cash.
• Cash payouts can be made through dividends or share repurchases.
Many companies use both methods. In some years, more cash is
paid out via dividends, but sometimes share repurchases are larger
than dividend payments.
• When business conditions are weak, firms are more willing to
reduce share buybacks than to cut dividends.
8. TRENDS IN DIVIDENDS AND SHARE
REPURCHASES
• When firms want to distribute cash to
shareholders, they can either pay
dividends or repurchase outstanding
shares.
• Whereas aggregate dividends rise
smoothly over time, they share
repurchases display much more volatility.
9. THE MECHANICS OF PAYOUT POLICY
• Cash Dividend Payment Procedures
• Share Repurchase Procedures
• Tax Treatment of Dividends and Repurchases
• Dividend Reinvestment Plans
• Stock Price Reactions to Corporate Payouts
10. CASH DIVIDEND PAYMENT
PROCEDURES
• Date of record (dividends)
Set by the firm’s directors, the date on which all persons
whose names are recorded as stockholders receive a
declared dividend at a specified future time.
• Ex dividend
A period beginning 2 business days prior to the date of
record, during which a stock is sold without the right to
receive the current dividend
• Payment date
Set by the firm’s directors, the actual date on which the
firm mails the dividend payment to the holders of record.
13. TAX TREATMENT OF DIVIDENDS AND
REPURCHASES
• A tax-law change in 2003, most taxpayers pay
taxes on corporate dividends at a maximum
rate of 5 percent to 15 percent, depending on
the taxpayer’s tax bracket.
• When the corporation is first taxed on its
income and then shareholders pay taxes on
the dividends that they receive.
14. DIVIDEND REINVESTMENT PLANS
(DRIPs)
• Plans that enable stockholders to use
dividends received on the firm’s stock to
acquire additional shares—even fractional
shares—at little or no transaction cost.
15. STOCK PRICE REACTIONS TO
CORPORATE PAYOUTS
• The reduced share price simply reflects that
cash formerly held by the firm is now in the
hands of investors. To be precise, this
reduction in share price should occur not
when the dividend checks are mailed but
rather when the stock begins trading ex
dividend.
16. RELEVANCE OF PAYOUT POLICY
• Residual Theory of Dividends
• The Dividend Irrelevance Theory
• Arguments for Dividend Relevance
17. RESIDUAL THEORY OF DIVIDENDS
• A school of thought that suggests that the
dividend paid by a firm should be viewed as a
residual—the amount left over after all
acceptable investment opportunities have
been undertaken.
18. DIVIDEND DECISION STEPS
• Step 1
Determine its optimal level of capital expenditures, which would be the
level that exploits all of a firm’s positive NPV projects
• Step 2
Using the optimal capital structure proportions, estimate the total amount
of equity financing needed to support the expenditures generated in Step
1.
• Step 3
Because the cost of retained earnings, rr, is less than the cost of new
common stock, rn, use retained earnings to meet the equity requirement
determined in Step 2. If retained earnings are inadequate to meet this
need, sell new common stock. If the available retained earnings are in
excess of this need, distribute the surplus amount—the residual—as
dividends.
19. THE DIVIDEND IRRELEVANCE THEORY
• Dividend irrelevance theory
Miller and Modigliani’s theory that in a perfect world,
the firm’s value is determined solely by the earning
power and risk of its assets (investments) and that the
manner in which it splits its earnings stream between
dividends and internally retained (and reinvested)
funds does not affect this value.
• Clientele effect
The argument that different payout policies attract
different types of investors but still do not change the
value of the firm.
20. ARGUMENTS FOR DIVIDEND
RELEVANCE
• Dividend relevance theory
The theory, advanced by Gordon and Lintner, that
there is a direct relationship between a firm’s
dividend policy and its market value.
• Bird-in-the-hand argument
The belief, in support of dividend relevance
theory, that investors see current dividends as
less risky than future dividends or capital gains.
23. RESIDUAL DIVIDEND POLICY
• Residual dividend is a dividend policy that
companies use when calculating the dividends
to be paid to shareholders. Companies that
use resident dividend policy fund capital
expenditures with available earnings before
paying dividends to shareholders.
24. Other Forms of Dividends
• STOCK DIVIDENDS
The payment, to existing owners, of a
dividend in the form of stock.
Accounting Aspects
Shareholder’s Viewpoint
The Company’s Viewpoint
25. Other Forms of Dividends
• Stock Splits
A method commonly used to lower the market
price of a firm’s stock by increasing the number of
shares belonging to each shareholder.
• Reverse stock split
A method used to raise the market price of a firm’s
stock by exchanging a certain number of
outstanding shares for one new share.
26. LESSON LEARNED
• Observe that over the long term the earnings
and dividends lines tend to move together.
• The earnings series is much more volatile than
the dividends series.
• The effect of the recent recession on both
corporate earnings and dividends was large by
historical standards.
27. LESSON LEARNED
• Firms exhibit a strong desire to maintain modest,
steady growth in dividends that is roughly
consistent with the long-run growth in earnings.
• Share repurchases have accounted for a growing
fraction of total cash payouts over time.
• When earnings fluctuate, firms adjust their short-
term payouts primarily by adjusting share
repurchases (rather than dividends), cutting
buybacks during recessions, and increasing them
rapidly during economic expansions.