Banking Chapter 17 Payout Policy Outline The Following Outline Correlated The Powerpoint

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Chapter 17

Payout Policy

I. Chapter Outline

The following chapter outline is correlated to the PowerPoint Lecture Slides. The PowerPoint slides

are referenced in bold. Alternative Examples to selected textbook examples are also available in the

PowerPoint Lecture Slides and are also referenced in bold.

17.1 Distributions to Shareholders (Slide 7)

• Dividends (Slides 9–10, 12, 14)

• Figure 17.1 Uses of Free Cash Flow (Slide 8)

• Figure 17.2 Important Dates for Microsoft’s Special Dividend (Slide 11)

• Figure 17.3 Dividend History for GM Stock, 1983-2008 (Slide 13)

• Share Repurchases (Slide 15)

– Open Market Repurchase (Slide 16)

– Tender Offer (Slide 17)

– Dutch auction (Slide 18)

– Targeted Repurchase (Slide 19)

17.2 Comparison of Dividends and Share Repurchases (Slide 20)

• Alternative Policy 1: Pay Dividend with Excess Cash (Slides 21–25)

• Alternative Policy 2: Share Repurchase (No Dividend) (Slides 26–31)

– Genron’s Future Dividends (Slide 29)

– Investor Preferences (Slide 30)

• Common Mistake: Repurchases and the Supply of Shares

• Example 17.1 Homemade Dividends (Slides 32–33)

• PowerPoint Alternative Example 17.1 (Slides 34–35)

17.3 The Tax Disadvantage of Dividends (Slide 43)

• Table 17.2 Long-Term Capital Gains Versus Dividend Tax Rates in the United States,

1971–2012 (Slide 44)

• Taxes on Dividends and Capital Gains (Slide 45)

• Example 17.2 Issuing Equity to Pay a Dividend (Slides 46–47)

• PowerPoint Alternative Example 17.2 (Slides 48–50)

Berk/DeMarzo • Corporate Finance, Fourth Edition, Global Edition 73

• Optimal Dividend Policy with Taxes (Slides 51–52, 55)

• Figure 17.4 Trends in the Use of Dividends and Repurchases (Slide 53)

• Figure 17.5 The Changing Composition of Shareholder Payouts (Slide 54)

17.4 Dividend Capture and Tax Clienteles (Slide 56)

• The Effective Dividend Tax Rate (Slides 57–58)

• Example 17.3 Changes in the Effective Dividend Tax Rate (Slides 59–60)

• Tax Differences Across Investors (Slide 61)

• Clientele Effects (Slides 62–64)

• Table 17.3 Differing Dividend Policy Preferences Across Investor Groups (Slide 63)

• Interview with John Connors

• Figure 17.6 Volume and Share Price Effects of Value Line’s Special Dividend (Slide 65)

17.5 Payout Versus Retention of Cash (Slide 66)

• Retaining Cash with Perfect Capital Markets (Slides 67–68, 75)

• Example 17.4 Delaying Dividends with Perfect Markets (Slides 69–70)

• PowerPoint Alternative Example 17.4 (Slides 71–74)

• Taxes and Cash Retention (Slide 76)

• Example 17.5 Retaining Cash with Corporate Taxes (Slides 77–78)

• PowerPoint Alternative Example 17.5 (Slides 79–80)

• Example 17.6 Microsoft’s Special Dividend (Slides 81–82)

• PowerPoint Alternative Example 17.6 (Slides 83–84)

• Adjusting for Investor Taxes (Slides 85–86)

• Issuance and Distress Costs (Slides 87–88)

• Agency Costs of Retaining Cash (Slides 89, 96)

• Example 17.7 Cutting Negative-NPV Growth (Slides 90–91)

• PowerPoint Alternative Example 17.7 (Slides 92–95)

• Table 17.4 Firms with Large Cash Balances (2015) (Slide 97)

17.6 Signaling with Payout Policy (Slides 98–100)

• Dividend Smoothing (Slide 98)

17.7 Stock Dividends, Splits, and Spin-Offs (Slide 108)

• Stock Dividends and Splits (Slides 108–113)

• Table 17.5 Cum- and Ex-Dividend Share Price for Genron with a 50% Stock Dividend ($

million) (Slide 109)

• Figure 17.8 Distribution of Share Prices for NYSE Firms (January 2015) (Slide 114)

• Spin-Offs (Slides 115–116)

II. Learning Objectives

17-1 List two ways a company can distribute cash to its shareholders.

17-2 Describe the dividend payment process and the open-market repurchase process.

17.5 Payout Versus Retention of Cash

This section explains how firms choose the amount to pay out to shareholders. It starts out with the

Modigliani and Miller (1961) finding that, in perfect capital markets, the choice of payout versus

17.6 Signaling with Payout Policy

Firms seldom vary the size of their dividend (they smooth dividends). If this is the case, then dividend

choice will contain information regarding expectations of future earnings. This dividend signaling is

17.7 Stock Dividends, Splits, and Spin-Offs

The chapter closes with a definition of stock splits and dividends. The authors attempt to answer the

question about why firms split their stock. They conclude that the goal is to keep the stock price

within a range that will allow investors to more easily trade the stock, since fractional ownership of

IV. Spreadsheet Solutions in Excel

The following Problems for Chapter 17 have spreadsheet versions of the problems available: 22, 23,

25, 30, and 32.

These spreadsheets can be downloaded from the Instructor’s Resource Center at: