j. k. dietrich - gsba 548 – mba.pm spring 2007 dividend policy may 2, 2007 (la) and may 1, 2007...
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J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
Dividend Policy
May 2, 2007 (LA)
and May 1, 2007 (OCC)
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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.
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
Course Summary and Review
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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?
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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)
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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
J. K. Dietrich - GSBA 548 – MBA.PM Spring 2007
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