BLOCK_18e_Chap018_PPT_Accessible

Page 1

• Introduction to the concept of learning as a transformative force.

Page 2: Learning Objectives

• Understand the decision-making process of the board of directors regarding the firm’s earnings.

• Analyze the information derived from dividends and their reflection of a firm’s life cycle stage.

• Identify factors influencing dividend policy.

• Assess the impact of stock dividends and stock splits on shareholders.

• Explain the rationale behind share repurchases instead of increasing dividends.

Page 3: The Marginal Principle of Retained Earnings

• Analyze stockholder benefits by comparing:

  • Rate of return on retained earnings.

  • Earnings generated from dividends.

• Projects should generate a higher rate of return than what shareholders can attain through other investments.

Page 4: Life Cycle Growth and Dividend Policy

• Development Stage I: No cash dividends; sales are increasing.

• Growth Stage II: Introduction of stock dividends; low cash dividends.

• Expansion Stage III: Continued stock dividends, moderate cash dividends, potential stock splits.

• Maturity Stage IV: Moderate to high cash dividends reflecting a high payout ratio.

• Trends indicate paths of constant growth or potential decline.

Page 5: Dividends as a Passive Variable

• Dividends are paid only if better investment opportunities do not exist for the funds.

• Retained earnings are the active decision variable, with remaining funds going to shareholders as dividends.

Page 6: An Incomplete Theory

• Residual theory states two options:

  • Retain earnings for reinvestment.

  • Pay out dividends.

• Theory lacks consideration of stockholder preferences regarding dividends.

Page 7: Arguments for the Relevance of Dividends 1

• Dividends help alleviate investor uncertainty, potentially affecting stockholder valuation.

• Information content of dividends influences stockholder perception of retained earnings.

Page 8: Arguments for the Relevance of Dividends 2

• Corporations often analyze investment opportunities against stockholder expectations.

• Mature firms balance investment opportunities and stockholder preferences when determining dividend payouts.

Page 9: Corporate Dividend Policy Table 1

• Rapid Growth Companies (e.g., Under Armour, Netflix, Tesla): High growth rates, 0% dividends.

• Slower Growth Companies (e.g., Target, Apple, Pfizer): Various payout ratios.

Page 10: Corporate Dividend Policy Table 2

• Continued analysis of growth rates and dividends for other corporations (e.g., Cisco, Altria).

Page 11: Dividend Stability

• Maintaining stable dividend payment is a key concern for stockholders.

• Stability can increase the perceived value of the firm and lower the applied discount rate on future dividends.

Page 12: Quarterly Earnings and Dividends Figure

• Depicts trends in quarterly earnings and dividend payments over time.

Page 13: Other Factors Influencing Dividend Policy

• Factors to consider include:

  • Firm’s cash flow position.

  • Access to capital markets.

  • Management’s desire for control.

  • Shareholders’ tax positions.

Page 14: Legal Rules

• Dividend payouts are restricted to prevent impairment of the firm's initial capital contributions.

• Dividends can only be distributed from past/current earnings.

Page 15: Dividend Policy Considerations Table

• Financial overview summarizing assets, liabilities, and potential dividends.

Page 16: Cash Position of the Firm

• Earnings growth doesn't always align with cash position; firms must carefully evaluate cash flow before deciding on dividends.

Page 17: Access to Capital Markets

• Stable dividend-paying firms can access financial markets more easily.

Page 18: Desire for Control

• Management may withhold dividends in closely-held firms to avoid cash dilution.

Page 19: Tax Position of Shareholders 1

• Higher taxes on dividends may motivate firms to repurchase stocks instead of paying dividends.

Page 20: Tax Position of Shareholders 2

• Tax Cuts and Jobs Act impacts dividend taxation, affecting investment decisions.

Page 21: Tax Rates Table

• Outline of new tax rates affecting capital gains and qualified dividends post-legislation.

Page 22: Dividend Payment Procedures 1

• Overview of cash dividend payments, yields, and important dates associated with dividends.

Page 23: Dividend Payment Procedures 2

• Details on Holder-of-Record and Ex-Dividend dates affecting dividend entitlement.

Page 24: Dividend Payment Procedures Conclusion

• Clarifies implications of the Ex-Dividend Date and Payment Date for shareholders.

Page 25: Stock Dividends

• Represents distribution of additional shares to stockholders, commonly in the 10%-range.

Page 26: Accounting Considerations for a Stock Dividend

• Financial position analysis before and after a stock dividend.

Page 27: Value to the Investor 1

• Demonstrates calculations of earnings per share pre- and post-stock dividend.

Page 28: Value to the Investor 2

• Calculations showing the unchanged market value for investors post-stock dividend.

Page 29: Possible Value of Stock Dividends

• If cash dividends remain constant during a stock dividend, total dividends may increase for shareholders.

Page 30: Use of Stock Dividends

• Used by growth firms to signify reinvestment; positive or neutral market reactions possible.

Page 31: Stock Splits 1

• Similarities to stock dividends; excess distributions treated as stock splits.

Page 32: Stock Splits 2

• Market price adjusts post-split, primary purpose being to make shares more accessible.

Page 33: XYZ Corporation Before and After Stock Split

• Financial impact of stock split on common stock and retained earnings.

Page 34: Reverse Stock Splits

• Purpose and implications of reverse stock splits for firms in distress.

Page 35: Stock Repurchase as an Alternative to Dividends

• Buying back shares as an alternative to cash dividends can raise earnings per share.

Page 36: Morgan Corporation Financial Data

• Overview of earnings, shares, earnings per share, and market price.

Page 37: Other Reasons for Repurchase

• Strategic motivations for repurchasing shares include low selling prices and maintaining demand.

Page 38: Stock Buybacks 1

• Table summarizing stock buybacks announced in early 2021.

Page 39: Stock Buybacks 2

• Continuation of stock buyback announcements and their financial implications.

Page 40: Dividend Reinvestment Plans

• Allows investors to purchase shares with dividends, providing benefits like low transaction costs.

Page 41

• Conclusion reinforcing the learning message and rights reserved by McGraw Hill LLC.