...2.0. 1.0 INTRODUCTION 3.1. 1.1 INTRODUCTION OF THE CASE This case is about the impact of an environmental factor (External issue) on dividend policy of the firm (Internal issue). The environmental disaster was Hurricane Katrina which was caused the huge destruction across the south-eastern United States. Because of the storm, the stock market notably fell down. Since it is possible that the price of the shares once more increase even more than before in the near future, Ashley Swenson, chief financial officer (CFO) of Gainesboro Machine Tools Corporation has the dilemma to buy back stock or to spend the money as dividend the shareholders. In fact, the question is: How can she forecast the fortune of the stock market? In the other word, what are the driving forces (as the external factors) which are affecting on internal factors such as dividend policy? 3.2. STATEMENT OF THE PROBLEM Ashley Swenson, chief financial officer (CFO) in mid-September 2005 needed to submit recommendation to Gainesboro’s board of directors regarding the company’s dividend policy. The Gainesboro’s stock also fallen 18%to $22.15 due to post impact of the Hurricane Katrina. Now, Ashley Swenson’s dividend decision problem was compounded by the dilemma of whether to use company funds to pay shareholder dividends or to buy back stock. 3.3. HISTORY OF THE COMPANY Gainesboro Corporation was a company who designed and manufactured a number of machinery parts, including metal presses, dies...
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...Open market repurchases and employee options Kathleen M. Kahle* Katz Graduate School of Business, University of Pittsburgh, Pittsburgh, PA 15260, USA (Received 20 September 2000; accepted 6 June 2001) Abstract This paper examines how stock options affect the decision to repurchase shares. Firms announce repurchases when executives have large numbers of options outstanding and when employees have large numbers of options currently exercisable. Once the decision to repurchase is made, the amount repurchased is positively related to total options exercisable by all employees but independent of managerial options. These results are consistent with managers repurchasing both to maximize their own wealth and to fund employee stock option exercises. The market appears to recognize this motive, however, and reacts less positively to repurchases announced by firms with high levels of nonmanagerial options. JEL Classification:G30, G32 Key Words: share repurchase, executive stock options, employee stock options I thank Ken Lehn, Frederik Schlingemann, Kuldeep Shastri, René Stulz, Shawn Thomas, Cynthia von Skansen, Ralph Walkling, and an anonymous referee for helpful comments and suggestions. Tomas Jandik and Gang Hu provided excellent research assistance. * Tel.: 412 648 1519, Fax: 412 648 1693 E-mail address: kkahle@katz.pitt.edu 0304-405X/00$-see front matter © 2002 Elsevier Science S.A. All rights reserved 1. Introduction Early studies of open market stock repurchases document...
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...Institute of Technology Determinants of Share Price Movements in Bangladesh: Dividends and Retained Earnings Author Shohrab Hussain Khan Supervisor Mr. Anders Hederstierna Thesis for the degree of MSc. in Business Administration Spring, 2009 Thesis Summary Title: Determinants of Share Price Movements in Bangladesh: Dividends and Retained Earnings Author: Shohrab Hussain Khan Supervisor: Anders Hederstierna Department: School of Management, Blekinge Institute of Technology Course: Master’s thesis in Business Administration, 15 credits (ECTS). Background and Problem Discussion: Financial scholars have been conducting studies of dividend policy for several decades; but different researchers have come to different conclusions. Financial economists have come to different conclusion about factors determining dividend policy and effect of dividend policies on common stock price. A general question may arise in the mind of the shareholders that the corporate dividend policy affects the value of their stocks. So, in addition to the theory of dividend policy, it is necessary to discuss the empirical evidence on the dividend payment practices of the corporations and their possible impacts on common stock prices. Empirical testing of dividend policy may focus on whether the determinants carry information in pricing the common stocks and whether the dividends are the only determinants serving as signals in conveying information about the current and future earnings of the...
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...(Case 11) In mid September 2005, Ashley Swenson, the chief financial officer (CFO) of a large computer-aided design and computer-aided manufacturing (CAD/CAM) equipment manufacturer needed to decide whether to pay out dividends to the firm’s shareholders, or to repurchase stock. If Swenson chose to pay out dividends, she would have to also decide upon the magnitude of the payout. A subsidiary question is whether the firm should embark on a campaign of corporate-image advertising, and change its corporate name to reflect its new outlook. The case serves as an omnibus review of the many practical aspects of the dividend and share buyback decisions, including (1) signaling effects, (2) clientele effects, and (3) the finance and investment implications of increasing dividend payouts and share repurchase decisions. This case can follow a treatment of the Miller-Modigliani dividend-irrelevance theorem and serves to highlight practical considerations to consider when setting a firm’s dividend policy. Suggested Questions for Advance Assignment to Students The instructor could assign supplemental reading on dividend policy and share repurchases. Especially recommended are the Asquith and Mullins article on equity signaling, and articles by Stern Stewart on financial communication. 1. In theory, to fund an increased dividend payout or a stock buyback, a firm might invest less, borrow more, or issue more stock. Which of those three elements is Gainesboro’s management willing to...
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...the markets expect dividends to be paid out consistently once they have been declared. While dividends have always been a popular way of distributing money to investors there has been a strong decrease in their issuance since 1978. Back then, about two thirds of publicly traded companies in the United States paid dividends. However by 1999 this number dropped to about one fifth of firms. The main reason for the decline was that until the new tax laws in 2003 passed, top bracket taxpayers paid a capital gains rate of 20%, while being taxed at 38.6% on their dividends. Therefore, paying dividends seemed to be an inefficient use of a firm’s cash and made these stocks less attractive to wealthy investors. Instead many firms favored stock repurchases. In addition, the trend away from dividends could be attributed to changes in publicly traded stocks. In general, firms that pay dividends are mature companies with slow growth and stable revenue. However in the 80’s and 90’s, the market saw firms going public earlier in their lifecycle when growth opportunities were stronger than current profits. Leading this trend away from dividends was the emergence of the many high growth technology firms...
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...Vol. 55, No. 1, 213–233. http://dx.doi.org/10.5465/amj.2009.0530 OFFSETTING ILLEGITIMACY? HOW PRESSURES FROM SECURITIES ANALYSTS INFLUENCE INCUMBENTS IN THE FACE OF NEW TECHNOLOGIES MARY J. BENNER University of Minnesota RAM RANGANATHAN University of Pennsylvania We study how analysts’ recommendations affect firms’ strategies during radical technological shifts. We find, from our study of firms in three industries undergoing technological change, that analysts’ recommendations trigger changes in strategic investments during periods of uncertain technological change. We also find that firms that make high investments despite negative analysts’ recommendations announce a higher value of share repurchases, an action that may offset the growing illegitimacy of these increased investments by signaling alignment with shareholders’ interests. Radical technological changes provide a source of exogenous variation that contributes to explanation of how firms balance technological pressures for adaptation and institutional pressures for legitimacy. The challenges and opportunities for firms faced with technological changes in their environments have been documented in a large body of organization and strategy research (e.g., Agarwal & Helfat, 2009; Christensen & Bower, 1996; Cooper & Smith, 1992; Henderson & Clark, 1990; Tushman & Anderson, 1986). Prior research has explored the difficulties firms face developing the new knowledge and capabilities required to respond to these major environmental...
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...------------------------------------------------- Assignment 1 ------------------------------------------------- lECTURER – STACEY ESTWICK Due date – 27 February 2012 ------------------------------------------------- ------------------------------------------------- Question 1 What is Linear’s current payout policy? Linear Technology went public in 1986 and is the seventh largest company by market capitalization under the SOX Act. It split its stock four times since its Initial Public Offering (IPO). Linear’s first dividend was declared on October 13th, 1992. Coghlan (Linear’s CFO) explained that the company had a positive cash flow since their IPO. He further posits that paying a dividend would signal to investors that buying shares in Linear was not as risky as buying shares in most other technology companies. Furthermore, offering a dividend would give Linear access to a new set of investors with varying...
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...Pecking Order, Trade-off, Signaling, and Market-Timing Theories of Capital Structure: a Review Anton Miglo University of Bridgeport 2010 Online at http://mpra.ub.uni-muenchen.de/46691/ MPRA Paper No. 46691, posted 6. May 2013 19:07 UTC The Pecking Order, Trade-off, Signaling, and Market-Timing Theories of Capital Structure: a Review Anton Miglo Associate professor, University of Bridgeport, School of Business, Bridgeport, CT 06604, phone (203) 576-4366, email: amiglo@bridgeport.edu. This version: 2013 Initial version: 2010 Abstract. This paper surveys 4 major capital structure theories: trade-off, pecking order, signaling and market timing. For each theory, a basic model and its major implications are presented. These implications are compared to the available evidence. This is followed by an overview of pros and cons for each theory. A discussion of major recent papers and suggestions for future research are provided. Introduction The modern theory of capital structure began with and the famous proposition of Modigliani Miller (1958) that described the conditions of capital structure irrelevance. Since then, been changing these conditions to explain factors driving capital many economists have structure decisions. Harris and Raviv (1991) synthesized major theoretical literature in the field, related these to the known empirical evidence, and suggested promising avenues for future research. They argued that asymmetric information theories of capital...
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...What can we learn from insider trade? Evidence from Thailand Nareemet Kittikhuntanasan Student ID: 5882942826 Project Advisor Kanis Saengchote, Ph.D. Committee Tanakorn Likitapiwat, Ph.D. Special Project Submitted in Partial Fulfillment of The Requirements for The Degree of Master Of Science in Finance Faculty of Commerce and Accountancy Chulalongkorn University Academic Year 2015 1. Introduction In general, the insiders are classified as the persons who have more information than the other investors and make an abnormal profit from this unpublished information. Under the Securities and Exchange Act B.E. 2535 of Thailand defines the insiders as directors, executives, auditors, their spouse and minor child, and the owner of more than 10% of stocks. Since they have valuable information than the outsiders, they might use this knowledge for their wealth. Hence, the other investors might use the insider trading data as a signal infers future view of the firms and adjust their portfolios and strategies to make some profits. Even though, there are many evidences supporting that insider trading is informative such as Aboody and Lev (2000) suggest that insiders make profit from their ability to acknowledge changed plan in the researcher and development budgets. Likewise, the paper from Jaffe (1974), Finnerty (1976) and Seyhun, (1986) support that insiders can make profit from their trading. However, many early literatures argue that there are market movement limitation...
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...Columbia University Burton Conference and the Yale School of Management Faculty Workshop. Professor Kemsley also expresses appreciation for financial support from the Columbia Business School Research Program in Tax. * Correspondence Author: Yale School of Management, 135 Prospect Street, P.O. Box 208200, New Haven, CT 06520-8200, deen.kemsley@yale.edu, (203) 432-3780, fax: (212) 432-6974. ** University of California at Los Angeles, Anderson Graduate School of Management, Box 9511481, Los Angeles, CA 90095-1481, (310) 825-4720, michael.williams@anderson.ucla.edu. Debt, Equity, and Taxes Abstract In this study, we extend Miller’s (1977) capital structure analysis by adding potentially high personal taxes on dividends and share repurchases, and by focusing on mature firms with at least some pre-existing equity. We demonstrate that personal taxes on equity distributions push new equity financing to an inferior corner, but they do not push internal equity (i.e., reinvested free cash flows) to a corner. Therefore an interior capital structure solution remains, in which firms are indifferent between using debt and internal equity financing, while preferring to avoid issuing additional external equity. Interestingly, many attributes of Miller’s model survive high personal taxes on equity distributions, including the aggregate debt-equity ratio, the identity of the marginal investment clientele, and investors’ portfolio allocations between debt and equity securities....
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...Chapter 17 Distributions to Shareholders: Dividends and Repurchases ANSWERS TO BEGINNING-OF-CHAPTER QUESTIONS 17-1 Investors who prefer a high payout policy would generally (a) need current cash income and (b) be in a low income tax bracket. Those who prefer a low payout would not need cash currently and would be in a high tax bracket. Universities and other tax-exempt institutions, and many retirees, are examples of those who prefer cash dividends, while people in their peak earning years often prefer low payouts. If someone holds a low payout stock and wants more cash income, he or she can sell the stock and buy a high payout stock, but that would result in brokerage costs and possibly capital gains taxes. If you owned a high payout stock and wanted less dividends, you could (1) sell out and switch to a low dividend stock, (2) try to get the company to lower its payout (while possibly starting a stock repurchase program), or (3) join a dividend reinvestment plan. Selling would involve brokerage costs and possibly capital gains taxes. The dividend reinvestment plan would avoid brokerage fees, but you would have to pay taxes currently even if you reinvest the dividends. You would have a good chance of getting the company to follow your advice under Point 2 if your name were Warren Buffett. 17-2 Here are the three theories, which are illustrated in the BOC model. They should be thought of as applying to investors in the aggregate and not to each...
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...Chapter 15 Distributions to Shareholders: Dividends and Share Repurchases Answers to End-of-Chapter Questions 15-1 The biggest advantage of having an announced dividend policy is that it would reduce investor uncertainty, and reductions in uncertainty are generally associated with lower capital costs and higher stock prices, other things being equal. The disadvantage is that such a policy might decrease corporate flexibility. However, the announced policy would possibly include elements of flexibility. On balance, it would appear desirable for directors to announce their policies. 15-2 While it is true that the cost of outside equity is higher than that of retained earnings, it is not neces-sarily irrational for a firm to pay dividends and sell stock in the same year. The reason is that if the firm has been paying a regular dividend, and then cuts it in order to obtain equity capital from retained earnings, there might be an unfavorable effect on the firm’s stock price. If investors lived in the world of certainty and rationality postulated by Miller and Modigliani, then the statement would be true, but it is not necessarily true in an uncertain world. 15-3 Logic suggests that stockholders like stable dividends—many of them depend on dividend income, and if dividends were cut, this might cause serious hardship. If a firm’s earnings are temporarily depressed or if it needs a substantial amount of funds for investment, then it might well maintain its regular...
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...Myers (1984) ‘The Capital Structure Puzzle’ 32 MYERS (1984) The Capital Structure Puzzle 2 36 Myers 3 39 The capital structure puzzle Myers – 1984 4 40 Andrade & Kaplan (1998) ‘How Costly is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distress’ 44 Kaplan 2 46 Andrade & Kaplan (1998) 3 51 Andrade & Kaplan – 1998 4 52 Lecture 3 56 Myers & Maljuf (1984) ‘Corporate Financing and Investment Decisions when Firms have Information that Investors Do Not Have’ 56 Myers and Majluf 2 61 Myers & Mailuf (1984) 3 66 Myers & Majluf – 1984 4 68 Frank & Goyal (2007) ‘Trade-off and Pecking Order Theories of Debt 74 Frank, Murray and Goyal, Vidhan 2 75 Frank & Goyal (2007) 3 83 Trade-off and pecking order theories of debt Frank & Goyal – 2007 4 85 Lecture 4 92 Ross (1977) ‘The Determination of Financial Structure: the Incentive-Signaling Approach’ 92 ROSS (1977) 2 94 Ross (1977) 3 95 Ross – 1977 4 95 Riley (2001) ‘Silver Signals: Twenty-Five Years of Screening and Signaling’ 99 Riley – 2001 2 101 Harris & Raviv (1990) ‘Capital Structure and the Informational Role of Debt’ 106 Harris & Raviv (1990) 2 108 Harris & Raviv – 1990 3 109 Heinkel & Zechner (1990) ‘The Role of Debt and Preferred Stock as a Solution to Adverse Investment Incentives’...
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...stock-market strategy. Investing in stocks with a history of growing dividends provides both a solid income stream and potential for capital appreciation. For most companies, the earnings per share (EPS) is the cash flow from which those dividends are paid. For a dividend to grow, it needs to be supported by EPS growth. Sponsored Link Simple Project Management Yes. It's easy. Nothing to install. Try it Free! www.smartsheet.com Earnings Per Share and Dividend Most dividend-paying companies make dividend payouts quarterly to coincide with the required quarterly financial reports. Earnings per share refers to the net income a company earns after all expenses and taxes divided by the number of outstanding shares. When the EPS number is published, that amount can be compared to the quarterly dividend amount the company paid for the quarter. A common corporate goal is to produce an EPS that grows year after year. Seasonal effects may cause earnings to fluctuate from quarter to quarter. To get a more accurate picture of earnings, compare full-year results or compare the same quarter year-over-year (such as the second quarter of last year compared to the second quarter of this year). Dividend Payout Ratio The dividend payout ratio is the dividend amount divided by the earnings per share. The ratio can be calculated on an annual or quarterly basis. A lower payout ratio means the company has excess earnings for future dividend increases. If you are looking for long-term, sustainable...
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...Student Name: Student ID Number: THE UNIVERSITY OF NEW SOUTH WALES JUNE / JULY 2006 FINS1613 Business Finance – Final Exam (1) TIME ALLOWED - 2 hours (2) TOTAL NUMBER OF QUESTIONS - 50 (3) ANSWER ALL QUESTIONS (4) ALL QUESTIONS ARE OF EQUAL VALUE. (5) THIS PAPER MAY NOT BE RETAINED BY CANDIDATE (6) CANDIDATES MAY BRING A PENCIL AND ERASER TO THE EXAMINATION. CANDIDATES MAY NOT BRING THEIR OWN CALCULATORS (7) THE FOLLOWING MATERIALS WILL BE PROVIDED BY THE EXAMINATIONS SECTION: Calculators, and Mathematical tables (PV and FV) PRINT YOUR STUDENT NUMBER ON TOP RIGHT HAND CORNER ANSWER ALL QUESTION ON THE PROVIDED ANSWER SHEET ALL ANSWERS MUST BE ANSWERED IN PENCIL. FINS 1613 Final Exam 1 S1 2006 Multiple Choice - 50 Questions: 1 mark each No negative marking 1) Hiphop Limited must choose between one of two mutually exclusive projects. • Project A has an up-front cost (t = 0) of $120,000, and it is expected to produce cash inflows of $80,000 per year at the end of each of the next two years. Two years from now, the project can be repeated at a higher up-front cost of $125,000, but the cash inflows will remain the same. • Project B has an up-front cost of $100,000, and it is expected to produce cash inflows of $41,000 per year at the end of each of the next four years. Project B cannot be repeated. Both projects have a cost of capital of 10 percent. Hiphop wants to select the project that provides the most...
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