Corporate Finance

...

A “payout policy” is a group of principles relating to an enterprise’s distributions to stockholders.

- Can be set up according to a dividend payout, a dividend per share, a growth in dividend per share, or any other metric.

- May include stock splits and stock dividends.

- Can consist of stock repurchases

For instance: Different Policies

- Passive Residual Policy: Dividends depends on the firm’s investment opportunities. Dividends are determined after the firm takes its investment decisions. e.g. Growth firms will have low dividend payout

- Stable Dollar Dividend Policies: most firms are reluctance to reduce dividends; therefore, they determine a certain dollar amount of dividend per share that they are certain they can maintain.

- Constant payout ratio Policy: Pays a constant % of earnings as dividends. Here dividends are fluctuating.

---------------------------------------------------------------

-

How a firm can pay out cash to its shareholders. What can be the forms of payout.

-

Ways that a firm uses to pay out cash to it’s shareholders

-

Cash Dividend

Firm pays out by cash to it’s share holder

- Regular cash dividend – cash payments made directly to stockholders, usually each quarter

- ‹ Extra cash dividends (a nonrecurring dividend paid to shareholders in addition to the regular dividend. It is brought about by special circumstances)

- ‹ Special dividends (less likely to be repeated)

- ‹ Liquidating dividends (financed from proceeds of asset sales)

Other information:

- The level of dividends is not fixed and may be changed by the firm at any time.

Dividends are reported in three ways:

- Dividend per share (DPS): Viet Nam Dong amount per share

- Dividend yield: DPS divided by share price

- Payout ratio: DPS divided by EPS

Crucial dividend dates:

- Declaration date: The top manager confirms a payment of dividends. On this day, dividend is considered as a legal liability of the corporation

- Ex-Dividend date: Date that decides if a stockholder is entitled to a dividend payment; stockholder before this date is entitled to a dividend.

- Record date: The declared dividends are distributable to stockholders of record on a particular date (include 2 days for change of ownership to be recorded, so “holders of record “ on ex-dividend date get dividends).

- Payment date: The dividend checks are sent to shareholders of record. For example:

[pic 6]

-

Share repurchase

- Firm purchases back shares from its stockholders.

- The number of outstanding shares is lowered. Share repurchase is usually an indication that the company's management thinks the shares are undervalued. The company can purchase shares directly from the market or offer its shareholder the option to tender their shares directly to the company at a fixed price.

There are different kinds of share repurchases:

- Open market purchases

- Fixed price tender offers

- Dutch auctions

Within a share repurchase:

- Shares purchased belong to the firm’s remaining stockholders.

- Usually, they are maintained in the firm’s treasury.

- They may be resold when the firm needs to issue new shares.

In many countries, repurchases are not allowed.

Example: Before stock dividends

Common Stock ($2 par; 1million shares) $2M

Add. Paid in capital 9M

Retained earnings 100M

Total equity $111M

After stock dividends

Stock dividends of 100,000 new shares at $50 each = $5M

Common Stock ($2 par; 1.1million shares) $2M + $100,000 = $2.1M

Add. Paid in capital 9M + $4.9M = 13.9M

Retained earnings 100M – 5M = 95M

Total equity $111M

Stock dividends come out of retained Earnings and get distributed between Common and add paid-in capital.

-

Stock Split

Stock split is a corporate action in which an enterprise divides its current shares into multiple shares. Although the number of shares outstanding rises by a specific multiple, the total dollar value of the shares remains the same as opposed to before-split amounts, because the split did not contribute any real value. The most common split ratios are 2-for-1 or 3-for-1, in other words, the stockholder will have two or three shares for every share held earlier.

For instance, assume that Toyota Corporation has 50 million stocks outstanding and the shares are trading at $200, which would give it a $5 billion market capitalization. The company’s board of directors decides to split the stock 2-for-1. Right after the split takes effect, the number of shares outstanding would double to 100 million, while the share price would be $100, leaving the market cap unchanged at $5 billion.

First of all, a split is usually undertaken

...