...dividend policies do not matter and should not matter in a company’s stock value. Arguments against dividend policies start from the fact that investors can create their own dividends on other investment option. A wise investor can look at more stable bonds to earn a return of investment rather than a dividend policy that can fluctuate. Secondly, earning from dividends is taxed higher than capital gains. For these reasons, investors are not lured to relative corporate dividend policies of companies as an accurate value of their stock. Some companies believe that a no-dividend policy is just as sound as companies with a dividend policy. Companies without a dividend policy can use their profit earnings to reinvest and expand the company shares or buy assets. Having a dividend policy foregoes these opportunities. For people who value profit certainty of a company, a sound dividend policy is important. It follows that a high and regular corporate dividend policy means that companies have a benchmark for doing well. Therefore, more dividends can equate to the overall health of the company. Dividend policies are more valuable to small companies or cooperatives with excess...
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...making buybacks an alluring substitute if improvements in operational performance are elusive. Yet while the increases in earnings per share that many buybacks deliver help managers hit EPS-based compensation targets, boosting EPS in this way doesn't signify an increase in underlying performance or value. Moreover, a company's fixation on buybacks might come at the cost of investments in its long-term health. A closer inspection of the market's response to buybacks illustrates these risks, since some companies' share price declined — or didn't respond at all. For example, Dell's announcement earlier this year that it would increase its buyback program by an additional $10 billion didn't slow the decline of its share price, which had begun to slide because of worries about operating results. Buybacks aren't without value. It is crucial, however, for managers and directors to understand their real effects when deciding to return cash to shareholders or to pursue other investment options. A buyback's impact on share price comes from changes in a company's capital structure and, more critically, from the signals a buyback sends. Investors are generally relieved to learn that companies don't intend to do something wasteful — such as make an unwise acquisition or a poor capital expenditure — with the excess cash. EPS May Be Up, but Intrinsic Value Remains Flat Many market participants and executives believe that since a repurchase reduces the number of outstanding shares, thus...
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...of the major causes: Instead of investing their profits in growth opportunities, corporations are using them for stock repurchases. Take the 449 firms in the S&P 500 that were publicly listed from 2003 through 2012. During that period, they used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock. Dividends absorbed an extra 37% of their earnings. That left little to fund productive capabilities or better incomes for workers. The buyback wave made the shareholders worried because in the wake of the financial crisis, many companies have shied away from investing them in the future growth of the companies. Many companies have cut their capital expenditure and increased the debt to boost their dividends and increase share buybacks. Massive resources being devoted to stock repurchases. Why are such massive resources dedicated to stock buybacks? Because stock-based instruments make up the majority of their pay, and buybacks drive up short-term stock prices. In general, when a company buys back shares at what turn out to be high prices, it eventually reduces the value of the stock held by continuing shareholders. “The continuing shareholder is penalized by repurchases above intrinsic value,” Warren Buffett wrote in his 1999 letter to Berkshire Hathaway shareholders. “Buying dollar bills for $1.10 is not good business for those who stick around.” There’s no logical economic rationale for doing repurchases to offset...
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...Count: 1,952 Contents Page Executive summary 1 Introduction 2 Main Body 2 Conclusion and recommendations 7 Bibliography 8 Executive summary The main aim of this report is to interpret Apple’s recent change in payout decision and to evaluate the impact of the new policy on shareholders’ value and Apple’s strategy. Firstly, previous and current payout policy will be described separately. Then, by analyzing firm’s previous and current circumstance including the change of the CEO, some considerable changes in Apple and the underlying reasons, are worth to discuss. This report concludes that the current payout policy—paying dividends along with the buyback plan—is more suitable for current company. Finally, implications of the new policy will be analyzed through using relevant and irrelevant theories as well as relevant data of competitors in the same industry. This report predicts that under the current good momentum of development, if Apple can hold this situation, it is prioritized to maintain this new policy. Introduction It is a Payout policy appraisal of Apple Computer which is reported to the firm’s shareholders or investors. The objectives of this report are shown below: * Analyze the pros and cons on recent change in payout policy. * Evaluate implications of the new policy on shareholder’s value and Apple’s financing and investment strategy. For a more detailed image analysis, some secondary data from Apple’s website and Yahoo Finance is used...
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...Share Repurchase: Is it good or bad? Financial Strategy (BMBA715.2) Date: 27th March 2013 Tutor: Mark Pilkington Author: Nandkumar Mahajan (136866461) Word Count: 3069 Table of Contents Executive Summary ............................................................................................................................. 3 Company capital structure & Shareholder value ...................................................................... 4 Why companies really repurchase shares? ................................................................................ 6 Is there any real value in share repurchase? ............................................................................. 7 Hewlett-‐Packard (HPQ) ................................................................................................................................ 7 Next Plc. (NXT) ........................................................................................................................................... 10 Conclusion ..................................................................................................................
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...HBR.ORG THE BIG IDEA Profits Without Prosperity Stock buybacks manipulate the market and leave most Americans worse off. by William Lazonick SEPTEMBER 2014 REPRINT R1409B The Big Idea PHOTOGRAPHY: ELISE FOR ARTICLE REPRINTS CALL 800-988-0886 OR 617-783-7500, OR VISIT HBR.ORG STOCK BUYBACKS Five years after the official end of the Great Recession, corporate profits are high, and stock market MANIPULATE THE booming. Yet most Americans the not sharing inis are the MARKET AND LEAVE recovery. While the top 0.1% of income recipients— MOST AMERICANS which include most of the highest-ranking corporate executives—reap almost all the income gains, good WORSE OFF. BY WILLIAM LAZONICK jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. COPYRIGHT © 2014 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. September 2014 Harvard Business Review 3 THE BIG IDEA PROFITS WITHOUT PROSPERITY Corporate profitability is not translating into widespread economic prosperity. The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little...
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...Technology Current Payout Policy? Linear Technology (LT) is like many firms where it used a combination of dividend payments and share / stock repurchases to distribute cash to its shareholders. With a cash dividend, cash is paid directly to shareholders while, with a stock repurchase, a firm uses its cash to buy back its own shares from the market which in turn reduces the number of outstanding shares (Titman and Keown et al., 2011). LT wanted to be able to attract different dividend clienteles of investors which have the both income goals and growth goals (Baker and Wagonfeld, 2004). As stated in the article provided, LT is a developer and manufacturer of analog semiconductors and in 1992 it initiated dividends (Baker and Wagonfeld, 2004). The firm’s Chief Financial Officer, Paul Coghlan, described this decision as being based on the fact that LT was very well positioned within the industry and that the firm had promising expectations for its business within its flourishing market (Baker and Wagonfeld, 2004). He also highlighted that LT had positive cash flows ever since its IPO and so by paying dividends to its shareholders they would send a stable and confident message of appeal to potential investors in a relatively risky market (Baker and Wagonfeld, 2004). The firm primarily set their quarterly dividend at a relatively low price of US$0.0625 per share and, with a Net Income of US$36.4 million in its 1993 Fiscal Year, only US$5.3 million was paid as dividends which only made...
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... critical assessment of the main theories of corporate payout policies. Dividend policy is one of the most important decisions that a manager of a firm makes in order to achieve the goal of the firm, maximising shareholder wealth. Determining a company's corporate payout policy is a question of "how much, when, and how", that is, the value of the payouts, when to deliver the surplus cash to investors, and in what form should the payouts be delivered. Corporate payout policy is also one of the most polarising topics in finance. Theorists such as DeAngelo and DeAngelo (2006a, 2006b, 2008), and Fama and French advance a theory on the financial life-‐cycle of the firm determining dividend policy. Other academics are less sanguine about how dividends affect the value of a firm's shares, Miller and Modigliani (1961) (hereafter MM) express in their dividend-‐irrelevance theory that in a frictionless market...
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...for each factor how and why you think it should affect payout policy? - Payout Policy Net income has only two possible assignments: either reinvestment in the company in the form of cash flow or distribution to shareholders in the form of dividends or share repurchases. What are the factors that determine the dividend policy of a company? - Basic principle : self-financing. It is a financial principle that a company must ensure its development through self-financing , ie financing its projects by past performance in reserve . This position is in the interest of managers, creditors and indirectly to the shareholders. The self-financing must be translated for shareholders by increasing the value of their shares, and therefore by capital gains. However, capital gains are taxed less heavily than dividends in many tax systems, we will define the preferences of investors through the clientele effect. The danger of an excessive self-financing is to cut the relation with financial markets , thus reducing the mobility of capital and investment opportunities. The company creates an internal capital market so the rate of return may be lower and misallocated resources. - Modigliani-Miller’s theorem: Unlike the theory of " Bird in the hand " which states that investors prefer the certainty of dividend payments to the possibilities of substantially higher capital gains, Modigliani and Miller (1961) show that shareholders are indifferent to the dividend policy adopted by the...
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...policy, or the means by which cash is returned to shareholders via cash dividends or share repurchases, is of critical concern for financial managers because of disagreements between management, investors, and financial academia on optimal policy. Payout policy decisions are often based upon key factors such as industry trends and behavior, decisions of benchmark competitors, and the predictability of future cash flows and sustainability. Linear Technology uses regular quarterly dividends, and share repurchases as opposed to special dividends to maintain their target payout ratio. Finally, Linear appears to smooth dividends with dividend growth as opposed to a traditional residual policy. As proposed by Modigliani and Miller, choices in dividend policy do not have an effect on firm value under the assumptions of fixed capital investment and debt policy. The model is extended to further prove the irrelevance of stock repurchases when adhering to the cash flow constraint. Finally, the concept of homemade dividends whereby an investor can duplicate a desired payout policy by selling or reinvesting shares enforces irrelevance from an investor. Theoretically, the irrelevance of payout policy on firm value should downplay the controversy of such decisions. Thus policy controversy and decisions are often the result of agency problems, signaling, and clientele effects. Applicability of these theories to Linear is discussed in the next section. Members of the technology industry...
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...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[1] dividend-irrelevance theorem and serves to highlight practical considerations to consider when setting a firm’s dividend policy. Suggested Questions 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 vary, and which elements remain fixed as a matter of the company’s policy? 2. What happens to Gainesboro’s financing need and unused debt capacity if: a. no dividends are paid? b. a 20% payout is pursued? c. a 40% payout is pursued? d. a residual payout policy is pursued? Note that case Exhibit 8 presents an estimate of the amount of...
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...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 vary, and which elements remain fixed as a matter of the company’s policy? 2. What happens to Gainesboro’s financing need and unused debt capacity if: a. no dividends are paid? b. a 20% payout is pursued? c. a 40% payout...
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...FINS1613 Business Finance Semester 2 – 2009 Version 1.0.0 12th October 2009 Contents Page 3 Page 7 Page 10 Page 14 Page 18 Page 23 Page 26 Page 29 Page 32 Page 38 Page 42 Basic Concepts Introduction to Financial Mathematics The Valuation of a Firm’s Securities Capital Budgeting Capital Budgeting Applications – Part 1 Capital Budgeting Applications – Part 2 Risk and Return The Capital Asset Pricing Model Cost of Capital and Raising Capital Capital Structure Dividend Policy Note: This course has prerequisites and, as such, these notes are written assuming that you have sound knowledge from those prerequisite courses. Business Finance– Semester 2 2009 2 Basic Concepts Basic Concepts Background Before we delve into the harder components of business finance, it is imperative that we learn the basics first. Types of Business Forms If you have previously studied Business Studies for the HSC, you can skip this section. Businesses are usually formed based on a set structure. The most common of these are: • Sole Proprietorships This is where the business is owned by a single person. It is very simple, fast to establish and generally has very minimal government regulations. The owner gets to keep all the profits himself so there is incentive to work harder. The downside is that it has unlimited liability (where if the business goes bankrupt, everything the owner owns can be taken by creditors). There is also difficulty in raising large sums of money as you are a single...
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...manner or not. Through financial analysis, any company or business can take decision in making financial investments, acquisition of company, selling of company, to know the financial standing of their business in present, past and future. It helps to stay competitive with others in making strategic financial decisions. Finance is the backbone of business; no business can run without finance. WHAT IS ETHICS IN FINANCE Ethics in finance is one of the main things which everyone has to follow from the small, medium and big level company because almost all the country depend up on the financial background of the country because without financial component no business can run for a long time. The assumption of modern financial-economic theory runs counter to the ideas of honesty, devotion, dependability and loyalty. Ethics in...
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...NOT FOR DISTRIBUTION TO STUDENTS Contains Assignment Questions and Suggested Solutions AT1 Accounting Theory & Contemporary Issues 2012 Printing Session 2 Suggested Solutions Level 4 Certified General Accountants Association of Canada 100 — 4200 North Fraser Way Burnaby, British Columbia Canada V5J 5K7 www.cga-canada.org © CGA-Canada, 2012 All rights reserved. These materials or parts thereof may not be reproduced or used in any manner without the prior written permission of the Certified General Accountants Association of Canada. Printed in Canada Every reasonable effort has been made to obtain permissions for all articles and data used in this edition. If errors or omissions have occurred, they will be corrected in future editions, provided written notification has been received by the publisher. Assignment 1 — Session 2 (Winter) This assignment is based on Modules 1 through 5 and is due at the end of Module 5. It is worth 5% of your final course grade. General instructions A. If this is your first time using the Online Learning Environment, check out the Course Orientation and the quick tutorials in the Support Centre. You will find general assignment FAQs in your Assignment Submission/Group Work area. B. Prepare your answers to these assignment questions in Word and save them as one Word document on your hard drive. For the recommended format and filename, see the Assignment Submission/Group Work/FAQ area. If this...
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