finance - lec 8 - dividend policy Flashcards
dividend
cash payment to SH as reward for investment
what is totla return of a dividend
and what is it similar to
div income + capital gain
(similar to total yield)
how do SH gain and add value
dividend payment- recieve dividend income
capital gain - maagment do something t hat icnreases value of teh share .
dividends only distriubted after
after tax profit
company needs to make what after paying what in order to pay dividends
profit after paying interest and tax
no net profit =
no divs
the dividend policy doesn’t impact what and why is it a benefit
impact profit figure for the company
so you can still copare by looking at profit for the year
sh dont have control over
dividend policy
sh dont got control over dividend policy but how can t hey ‘impact div policy
if dont like proposal @ AGM they can vote it down and maangment may reconsider
cant propose their own
dividends are reccomendedd by who and approved by who
directors
SH at AGM
What gives value to financial instruments
entitlement to future cashflow
your entitleent to dividendt pahment depends on whn
you bought stock
when company pay dividends theyve ot to make an announcement and identify ….. before
eligible SH b4 payment is due
if i want to pay div on 30th april why i can tkeep it opentill 29th
got new wave of sh all of a sudden
what is xd/ex div date
date dividend must be paid to those holdingg shares
after xd/ex div date what happens
mkt revise valuation of stick
and stock price decreases by the amount of dividend
what does cum div mean
price of share between announcement and ex div date
why does share price fall on the ex div date
SH who buy immediatley after the xd date dont hae a right to recieve the dividend
is this the doing of teh company ?
for practical purposees when do managment draw line on who can buy shsres
2-3 weeks b4 the payment
Sh own company but managment run company on SH behalf
whats primary obj of managment(3 things)
serve sh interest
max sh wealh
max company value/sahre price
how do managment maximise copmany value/shre price
or better still whats the dilemma
w leftover money do we pay dividends or reinvest in positive NP (pay something but project returns you more) - this lets company become more valuable and increase share
serving SH interest is not any easy decision what s the main descison /consideration of amgnamget
what extent do they use net profit to make sh happy an d what extent do tehy use money to reinvest
how do we measure dividends for one company
dividend per share
also what is DGM
how do we measure dividends for multiple companies
dividend yield - a relative measure and it gives a % we can use to compare companies
DPS(dividend per share)/Share price
what does a dividend yield of 15 % tell us
only 15% of teh value of shares comes from dividend patment
majority comes from inherent value pf company i.e the positive investments they have made
summary - shows us how much value is based on dividend and how much comes from +Ve investment activities
if company dont pay dividend and shares and is valuable where does valu come frm
future profitablity
e.g amaxon and google dont want people to invest based on income but would rather want people to trust them to icnrease vlue fo share
what is a divideend decission 2 parts
consideration of hwo much copany should retain to reinvest in the company and how much it shoudl distribute to SH
if copany got +Ve NPV prokect in whic to I money shoul they retain funds rather than having to rasie funds externally
how much a dividedn can be is affected by what 3 factoes
internal
external
legality
according to teh copanies act dividends can only eb paid out of
distributable profits
give exmaple fo company can only sell dividends through distributable profits
buy land the alue now x100 and profit is now bigger due to the revaluation of assets
but unless you sell asset and get money it is not a redistributable profit
accoutnign profit not equal to
distributable profit
lenders may put x on dividend paymetn
constraints
constraints are more common for what size business
small / meidum
give example explanatio of restricitve constraints
in % , relative or absolute terms
cannot pay dividends to sh for x years
max you allowed to pay regardless of profit figure is x or 15% of profit
why do lenders impose restrictions
to ensure money remains in bs
bs is profitabl
and abiltiy that it is guaranted to pay loan abck to leder
if you dont hae vash in bank cant …
pay divided
not all profitable companies are
vcahs rich
with invstment opps what is a major SOF
retained earnings
if you got lots of +Ve NPV opps and dont got much choice for at use of moeny which is pay DIV what wil you finfanceit by
spedning lots of cash
divided irrelevance
whats the argument in dividend irrerlevance
some think its irrelevant some think its not
who made dividend irrelevance
modigliani and miller
what did modigliani and miller argue - first theory- value of company
value of the company comes from its assets ,chane to asset value e.g. +ve investment in NPV project means assets becmore more baluable
so only way for company value to chhange is if they invest/sell assets
what is the key divident arguemnt/point in MM theory 1
if pay dividend - concerning SH - it don’t impact value
SH are indifferent between dividend income and capital gain - dont care whether wealth is in either as long as it is increasing by one way or the other
use an exmapkle to ilustrate the MM div thoery/argyment
sh got 1 milly in shares company gets 100k to pay as div or invest/borrow against an asset
if they pay as dividend asset avlue decreasse by 100k
if they borrow against asset liablity increasess by 100k so bet value decreases
so i f dont pay div total wealth is 1milly
ig they pay div total wealth in comp worth 900k + recieve 100k in div
so whether get div income or a an increase in alue of share got 1milly either way so val of company as far as SH concerned wdont change anyhing as total wealth stays the same
even if sh want a div payment and company dont pay what can they do
manufacture own dividend
how can sh manufacture own dividend
hold 1 milly in amazon wanna recieve 10% of investment value
sell 10% of shares yearly =
amazon paying 10% div every year to ya
or
sell 10% amazon shares over the next year the profit not given as dividends will be used to increase the value of the company then sell another 10%
conclude/summarise the dividend policy point
if div policy changes value 1-1 , what you loose in share value you gain in dividend income - they cancel each other out
as far as SH concerned there’s been no change in wealth there wealth remain the same
dividend policy got no impact on company valuation
sh dont care where wealth is coming from
SH dont care where wealth is coming from what does this mean we should use
optimal investment pilkcuy
what is optimal investment policy
invest in all projects w positive NPV
Surplusfunds (as on positive NPV projects left) can be paid out as dividends
dividends are a residual decision
in the optitmal invesmtent strategy why do we use all capital for +ve NPV investment- only way for
company to add value
why is dividends a residual decision i.e. what is the priority
investing and capital gain is the priority
who cam eup w dividend relevance theory
litner and gordon
waht is litner and gordon relevance theory 4 points
dividends are preferred due to theri certianty
current dividends prvide a reliable return-future profits are less atttractive( is this due to the time value of money
this suggests dividend policy is relevant to markt value as investors will value copmanies that pay dividends out more highly
dividend relevance theory questions the assumption that sh are
indiffernet between div income and captial gain
in terms of dividend relevance what does empirical evidence suggest
sh prefer div income
- when announced div are gonna be paid , it is liekly to be honourred so you almost certain
wheras capital gain are flucruaory affected by factors some of which yu can’t prefict so control
+ bettter to recieved money in dividends tax wise
in the releance theor what has impact on copany valuation
DIVIDEND POLICY
DIVIDEND GROWTH MODEL
market value of the company =
present value of future dividends
the higher the dividend payment
the greater the market value
formaula for value of share
D1/(r-g)
what should we view the formula for the value of share for and what shooldne we view it for and why
vew it as relationship btwn future div and growth rate
dont use it as formula to prove ir/relevance div policy cuz then amaxon and google worth 0 as tehy dont have D1
What is D1
What you don’t currently pay to SH,
D1 is D0 x 1+g
if you dont make any div payments now there is no
D1
duture of div patmens all based on … therefore if comp dont pay what happens to g
based on growth rate
if comp dont pay div the growth increases
if D x 2 what happens to value of share
increases
if g goes up what happens to (r-g) and what happens to share value
becomes smaller
denominator reduces therefore share value increases
so value of amazon/google comes from G not d 1
dividend as a signal
what is asymmetry of info
managers and directors of comp know more about prospects/company than SH - almost know nish
managers only announce or increase div if they confident and think they can upkeep it in the future - severe consequences for div cuts and wrong info as SH don’t liek div cuts - c
strong dividends are seen as
good news
why strong div seen as good news
know managers dont want to make mistaje
strong dividends increase ….
value pf firm / share
strong div increase value of firm/sahre so and son on dividend annoucnement date we see
an icnrease in share price
an increase in share price is percieved in the market as a goog signal about teh company why
cause maanger know everything + hesitatnt o lie
when does whole asymmetry of info disapear
0 condequences for lyin/bad performance/managment
if a company is considering cutting dividneds what do they ahve to do and why
explain clearly why taken this action
so dont confuse the market
