ReturningCashtotheOwnersDividendPolicy.ppt

Returning Cash to the Owners: Dividend Policy Aswath Damodaran First Principles Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle rate should be higher for riskier projects and reflect the financing mix used - owners’ funds equity or borrowed money debt Returns on projects should be measured based on cash flows generated and the timing of these cash flows; they should also consider both positive and negative side effects of these projects. Choose a financing mix that minimizes the hurdle rate and matches the assets being financed. If there are not enough investments that earn the hurdle rate, return the cash to stockholders. The form of returns - dividends and stock buybacks - will depend upon the stockholders’ characteristics. Objective: Maximize the Value of the Firm Dividends are sticky Dividends tend to follow Earnings Dividends follow the Life Cycle More companies are buying back stock.. Measures of Dividend Policy Dividend Payout: measures the percentage of earnings that the company pays in dividends Dividends / Earnings Dividend Yield : measures the return that an investor can make from dividends alone Dividends / Stock Price Dividend Payout Ratios in the United States Dividend Yields in the United States Three Schools Of Thought On Dividends 1. If a there are no tax disadvantages associated with dividends b companies can issue stock, at no cost, to raise equity, whenever needed Dividends do not matter, and dividend policy does not affect value. 2. If dividends have a tax disadvantage, Dividends are bad, and increasing dividends will reduce value 3. If stockholders like dividends, or dividends operate as a signal of future prospects, Dividends are good, and increasing dividends will increase value Dividends don’t affect value The Miller-Modigliani Hypothesis: Dividends do not affect value Basis: If a firms investment policy and hence cash flows dont change, the value of the firm cannot chang