Rough diamonds may sometimes be mistaken for worthless pebbles —Thomas Browne For use in Fin2 2010 only
Jan 02, 2016
Rough diamonds may sometimes be mistaken for worthless pebbles
—Thomas Browne
For use in Fin2 2010 only
For use in Fin2 2010 only
For use in Fin2 2010 only
For use in Fin2 2010 only
“Do you know the only thing that gives me pleasure? It's to see my dividends coming in.” —John D. Rockefeller
[What a loser quote!—CYB]
For use in Fin2 2010 only
Three major financial policies
Optimal/Target capital structure– How much debt?
» Stone Container
Payout policy– Dividends and repurchases
» Linear Tech
Risk management/hedging policy– Still to come…
For use in Fin2 2010 only
Payout Policy—Checklist Can the company afford to pay a regular dividend?
– Volatility of cash flow
– Profitability: how fast is cash replenished by profits?
– Low operating leverage makes a regular dividend sustainable
– Perceived big penalties for cutting regular dividends—self-fulfilling prophecy
How much should the company hold in cash?
– Tax disadvantage of holding cash
– Agency cost of “excess cash”
– vs. Strategic Value of cash for » M &A» Price wars» Large capital investments
– Excess cash can be returned to shareholders via special dividend or repurchases
Signalling—ambiguous– High payouts signal times are good, no fear
– High payouts signal no more opportunities© Carliss Y. Baldwin, 2010For use in Fin2 2010 only
Plus, you should know
Payout options– Regular dividend– Special dividend– Repurchase
Mechanics/dynamics of dividends– Announcement, ex-date, distribution date
For use in Fin2 2010 only
“Capital as such is not evil; it is its wrong use that is evil. Capital in some form or other will always be needed.”
— Mohandas Gandhi
For use in Fin2 2010 only
ßE,comp
RA
RE
ßD
ßA
ßE
RD
WACC = (D/V)Rd(1-t) + (E/V)Re
ßD,comp
Unlever at comp’sactual D/V(Needd)
Relever at target D/V
(Needd)
CAPM
CAPM
CAPM
CAPM: Ri = Rf + i(Risk Premium)Betas: a = (D/V)d + (E/V)e
be = ba + (D/E)(ba – bd)
WACC calculations roadmap
For use in Fin2 2010 only
ßE,comp
RA
RE
ßD
ßARD
WACC =Ra - t Rd D/V
ßD,comp
Unlever at comp’sactual D/V(Needd)
CAPM
M&M Prop. II
(Need Rd)
CAPM
CAPM: Ri = Rf + i(Risk Premium)M&MII: Ra = (D/V)Rd + (E/V)Re
Portfolio Betas: a = (D/V)d + (E/V)e
An shorter route, arriving at the same place
CAPM
For use in Fin2 2010 only
Limitations of WACC—formula accounts for tax shields only
For use in Fin2 2010 only