ch-Distribution.ppt

Chapter 11 Distribution I. General Ieda 1. What can be distributed to shareholders ? After tax profit: to shareholders Earnings before salary, interest, and taxes: to most of benefit group of the firm To whom profits will be distributed ？ 2. Basic process of distribution New revised “The Company Law of PR China” in 2006： The after tax profit of a company should be distributed with following steps: Make up the losses of previous years. when authorized earnings surplus (or earnings reserve) are not enough to do it. Collect authorized earning surplus to meet loss, expand business and capitalization. --collect percentage ：10%；（cover accumulated loss,） --when authorized earning surplus meet 50% of registered capital , could be no collection； --after capitalization, the amount of authorized earning surplus should not be less than 25% of registered capital； Preferred dividend pay out; Collect discretionary earning surplus Common dividend pay out 3. Principles of dividend distribution According to number of shares. Dividend should be came from accumulative profit. If there is no profit this fiscal year, there should be no dividend. “no earnings ,no dividend” . After meet losses, earnings surplus could be used to pay dividend with approving of stockholders meeting under the condition of: after dividend earnings surplus need to be greater than 25% of registered capital. II. Brief introduction of distribution theories 1. Dividend irrelevance: Investors don’t care about payout. 2. Bird-in-the-hand: Investors prefer a high payout. 3. Tax preference: Investors prefer a low payout. 4. Investors segmentation: Different investor’s preference 5. Dividends as Signals: Dividend increases send good news about cash flows and earnings. Dividend cuts send bad news. 4. Investors segmentation: What’s the “clientele effect”? 5. Dividends as Signals Dividend especially cash dividend is a kind of signals what managers want to let market know. Invest