corporate_finance_chapter6.pptx

7/25/2019 corporate_finance_chapter6.pptx

1/20

CHAPTER 6DIVIDENDS AND SHARE

REPURCHASES: BASICSPresenters namePresenters titledd Month


2/20

!" INTR#DUCTI#N

$ A dividendis a %ro rata distri&'tion to shareholders that is de(lared & the(om%ans &oard o) dire(tors and ma or ma not re*'ire a%%ro+al &shareholders"

$ A repurchaseo) sto(, is a distri&'tion in the )orm o) the (om%an &'in- &a(,its sto(, )rom shareholders"

$ The &oard o) dire(tors determines the (om%ans %ao't %oli("$ Cash di+idends and share re%'r(hases are &oth methods o) distri&'tin- (ash

to shareholders"

. The e))e(ts on )inan(ial ratios and on shareholders in+estment ret'rns aredi))erent &et/een these t/o methods"

. These distri&'tions ma %ro+ide in)ormation a&o't the (om%ans )'t're%ros%e(ts"

. Iss'in- (om%anies (annot ded'(t distri&'tions to shareholders )or ta0%'r%oses"

Co%ri-ht 1 23!4 C5A Instit'te 2


3/20

2" DIVIDENDS: 5#RMS

Cash Distri&'tions

Re-'lar Cash

Di+idend

E0tra Di+idend

i*'idatin- Di+idend

Non(ashDistri&'tions

Sto(, Di+idend

Sto(, S%lit

Re+erse Sto(, S%lit



4/20

RE7UAR CASH DIVIDENDS

$ A regular cash dividend is a (ash di+idend %aid at re-'lar inter+als o) time

. The re-'lar inter+als ma &e an )re*'en(8 &'t the most (ommon are*'arterl8 semiann'all8 or ann'all"

. Tenden( o) (om%anies is to maintain or in(rease di+idends

. #)ten +ie/ed as si-nals o) mana-ements assessment o) the (om%ans)'t're 9that is8 /hether the (om%an (an maintain the di+idend in the )'t're"

. Com%anies %re)er not to ('t or red'(e the di+idend"

Co%ri-ht 1 23!4 C5A Instit'te ;


5/20


6/20

E?TRA #R SPECIA DIVIDENDS

$ An e0tra di+idend 9or s%e(ial di+idend is a di+idend that is either %aid & a(om%an that does not %a di+idends re-'larl or %aid & a (om%an inaddition to a re-'lar di+idend"

. E0am%le: @hole 5oods Mar,et anno'n(ed a 2 s%e(ial di+idend inDe(em&er 23!2" This /as in addition to its 3"23 %er *'arter (ash di+idend"

$ Moti+ation: Pa o't in stron- ears /itho't in+estors e0%e(tin- an in(reaseddi+idend"



7/20

IUIDATIN7 DIVIDENDS

$ A li*'idatin- di+idend is a distri&'tion o) (ash to shareholders /hen

. 7oin- o't o) &'siness8 or

. Sellin- a %ortion o) the &'siness8 or

. Pain- a di+idend /hen retained earnin-s are not %ositi+e"

Co%ri-ht 1 23!4 C5A Instit'te


8/20

ST#C DIVIDENDS

$ A stock dividend is the distri&'tion o) additional shares o) sto(, toshareholders on a %ro rata &asis"

. Also ,no/n as a bonus issue of shares"

$ 7enerall stated as a %er(enta-e o) ('rrent shares o'tstandin-"

$ A sto(, di+idend does not (han-e a shareholders %ro%ortionate o/nershi%8 theshareholder does not re(ei+e (ash8 and there are no ta0 (onse*'en(es"

$ Ad+anta-es )or the iss'er:

!" More shares o'tstandin- and8 there)ore8 %otential )or more shareholders"

2" o/ers the sto(,s %ri(e8 /hi(h ma ma,e it more attra(ti+e as an

in+estment"4" No e(onomi( e))e(t"

;" Does not a))e(t )inan(ial ratios"

Co%ri-ht 1 23!4 C5A Instit'te


9/20

ST#C DIVIDENDS IN PRACTICE

$ More %re+alent in some (o'ntries"

$ Some (om%anies %a sto(, di+idends on a re-'lar &asisF some %a theseo((asionall"

Co%ri-ht 1 23!4 C5A Instit'te G


10/20

ST#C SPITS

A stock split is a %ro%ortionate in(rease in the n'm&er o) shares o'tstandin-"

$ Stated in the )ollo/in- )orm:

N'm&er o) ne/ shares : N'm&er o) old shares

$ So8 2:! means that )or ea(h share held &e)ore the s%lit8 the shareholder holdst/o shares a)ter the s%lit"

$ Sto(, s%lits do not a))e(t the di+idend ield or the di+idend %ao't ratio"

$ A((o'ntin-: Memorand'm entr8 no (han-e in a((o'nts"

$ The anno'n(ement is -enerall +ie/ed as a %ositi+e si-nal"

Co%ri-ht 1 23!4 C5A Instit'te !3


11/20

REVERSE ST#C SPITS

A reverse stock split is the %ro%ortionate red'(tion in the n'm&er o) shares"

$ A re+erse sto(, s%lit has the o%%osite e))e(t o) the traditional8 or )or/ard8 sto(,s%lit:

. It red'(es the n'm&er o) shares8 /ith the e0%e(tation o) in(reasin- the sto(,%ri(e"

$ A !:2 re+erse sto(, s%lit res'lts in hal) the n'm&er o) shares o'tstandin- a)terthe s%lit"

$ The -oal ma &e to in(rease the share %ri(e to ma,e it more attra(ti+e )orinstit'tional in+estors"

$ Re+erse sto(, s%lits are most (ommon )or (om%anies in )inan(ial distress"

$ It is not %ermitted in some (o'ntries"

Co%ri-ht 1 23!4 C5A Instit'te !!


12/20

4" DIVIDENDS: PAMENT CHR#N##7

De(larationDate

E0.Di+idendDate

Holder.o).Re(ord Date

Pament Date

Relationship Based on Trade Cycle

CorporationIssues

DividendDeclaration

Established byMarkets Based on

the TradeSettlement Cycle

Established byCorporation as

Date of!nership of

Stock

Established byCorporation as

Date theDividend Is

"ctually #aid



13/20

;" SHARE REPURCHASES

$ A share repurchase is the transa(tion in /hi(h the sto(, iss'er &'s &a(, itsshares )rom in+estors"

. Also ,no/n as a share buyback"

$ #n(e re%'r(hased8 the shares &e(ome treasury shares 9or treasury stock"

$ Share re%'r(hases are restri(ted & re-'lations in some (o'ntries"

$ Moti+es )or re%'r(hasin- shares in(l'de the )ollo/in-:

. Si-nal that the sto(, is 'nder+al'ed"

. 5le0i&ilit o) distri&'tin- (ash /itho't the e0%e(tation o) (ash di+idends"

. Ta0 e))i(ien( /hen the ta0 rate on (a%ital -ains is less than that o) (ash

di+idends". #))set share in(reases )rom e0e('ti+e sto(, o%tions"



14/20

SHARE REPURCHASE METH#DS

Buy in the OpenMarket

Use &ro,ers to&' shares"

Method %ro+ides

)le0i&ilit )or the(om%an"

Fied Price!ender Offer

S%e(i) then'm&er o)shares and the

share %ri(e" B' %ro rata i)o+ers'&s(ri&ed"

Dutch "uction!ender Offer

S%e(i) then'm&er o)shares and the

ran-e o) %ri(es" Shareholdersdetermine then'm&er o)shares the /illsell &a(, ands%e(i) the %ri(e/ithin the ran-e"

Direct#egotiation

Ne-otiate /ith as%e(i)i(shareholder"

Method ma &e'sed to %re+ent


15/20

SHARE REPURCHASE ANDEARNIN7S PER SHARE

The Dil'tin- Com%an is %lannin- a !33 million share re%'r(hase" Its ('rrentsto(, %ri(e is 2> %er share8 and there are !6 million shares o'tstandin- %rior tothe re%'r(hase" Earnin-s %er share /itho't the re%'r(hase /o'ld &e 4 %ershare" @hat is the earnin-s %er share 'nder ea(h o) these t/o s(enariosJ

S(enario !: Use idle (ash on hand"

S(enario 2: Borro/ )'nds at a)ter.ta0 rate o) K"

S(enario !:

Net in(ome L 4 !6 million L ; million

EPSScenario $ L ; million

9!6 million ; million L ; %er shareS(enario 2:

Net in(ome L 4 !6 million 93"3 !33 million L ;! million

EPSScenario % L ;! million 9!6 million ; million L 4";! %er share

Co%ri-ht 1 23!4 C5A Instit'te !>


16/20

SHARE REPURCHASE ANDB## VAUE PER SHARE

$ @hen the mar,et %ri(e %er share is -reater than the &oo, +al'e %er share9BVPS8 the &oo, +al'e %er share o) e*'it /ill de(rease /ith a sharere%'r(hase"

Contin'in- the Dil'tin- Com%an e0am%le and addin- the &oo, +al'e %er share

o) 23:

S(enario !:

Boo, +al'e L 923 !6 million !33 million L 223 million

BVPSScenario $ L 223 million

9!6 million ; million L !"44 %er shareS(enario 2:

Boo, +al'e L 923 !6 million !33 million million L 2!4 million

BVPSScenario % L 2!4 million 9!6 million ; million L !"> %er share



17/20

SHARE REPURCHASE VS" CASH DIVIDENDS

I)O. The ta0 (onse*'en(es o) di+idends and (a%ital -ains are the same and

. The in)ormation (ontent o) (ash di+idends and sto(, re%'r(hases is thesame8

Then the e))e(ts o) (ash di+idends and re%'r(hases on shareholder +al'e /ill &e

the same"

Both (ash di+idends and sto(, re%'r(hases:

. Red'(e assets & the amo'nt o) the di+idend or re%'r(hase"

. Red'(e e*'it & the amo'nt o) the di+idend or re%'r(hase"

. Pro+ide in+estors /ith the same (ash )lo/"

Co%ri-ht 1 23!4 C5A Instit'te !


18/20

>" C#NCUDIN7 REMARS

$ Share re%'r(hases ha+e a %ositi+e e))e(t on share %ri(es"$ Di+idend initiations ha+e a %ositi+e e))e(t on share %ri(es"

$ Di+idend in(reases ha+e a %ositi+e e))e(t on share %ri(es"

Co%ri-ht 1 23!4 C5A Instit'te !


19/20

6" SUMMAR

$ Di+idends (an ta,e the )orm o) re-'lar or irre-'lar (ash %aments8 sto(,di+idends8 or sto(, s%lits"

$ Re-'lar (ash di+idends re%resent a (ommitment to %a (ash to sto(,holderson a *'arterl8 semiann'al8 or ann'al &asis"

$ The ,e dates )or (ash di+idends8 sto(, di+idends8 and sto(, s%lits are the

de(laration date8 the e0.date8 the shareholder.o).re(ord date8 and the %amentdate"

$ Share re%'r(hases8 or &'&a(,s8 most o)ten o(('r in the o%en mar,et"Alternati+el8 tender o))ers o(('r at a )i0ed %ri(e or at a %ri(e ran-e thro'-h aD't(h a'(tion"

$ Share re%'r(hases made /ith e0(ess (ash ha+e the %otential to in(reaseearnin-s %er share8 /hereas share re%'r(hases made /ith &orro/ed )'nds (anin(rease8 de(rease8 or not a))e(t earnin-s %er share8 de%endin- on the a)ter.ta0&orro/in- rate"

Co%ri-ht 1 23!4 C5A Instit'te !G


20/20

SUMMAR 9C#NTINUED

$ A share re%'r(hase is e*'i+alent to the %ament o) a (ash di+idend o) e*'alamo'nt in its e))e(t on shareholders /ealth8 all other thin-s &ein- e*'al"

$ Anno'n(ement o) a share re%'r(hase is sometimes a((om%anied & %ositi+ee0(ess ret'rns in the mar,et /hen the mar,et %ri(e is +ie/ed as re)le(tin-mana-ements +ie/ that the sto(, is 'nder+al'ed"

$ Initiation o) re-'lar (ash di+idends (an also ha+e a %ositi+e im%a(t on share+al'e"


corporate_finance_chapter6.pptx

Documents