Dividend Payout and Firm Performance
Added on 2020-04-21
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Running head: FUNDAMENTALS OF CORPORATE FINANCEFundamentals of corporate financeName of the studentName of the universityAuthor note
1FUNDAMENTALS OF CORPORATE FINANCETable of ContentsQuestion 1..................................................................................................................................2a.Difference among residual payout policy and managed payout policy..........................2b.Findings of Lintern published during 1956 with regard to dividend policy...................3c.Academics meaning while it says companies cater to particular “payout clientele”......3Question 2..................................................................................................................................3a.Main issues while making the initial public offering (IPO)............................................3b.Main issues while considering whether to take the company private.............................5Question 3..................................................................................................................................5a.Description of repurchase method..................................................................................5b.Analysis of the statement – Payout policy cannot affect firm value...............................6c.Difference between ex-dividend and cum-dividend stocks............................................6Question 4..................................................................................................................................7a.IPO is costly undertaking and thus IPO conducting shall be avoided............................7b.Firms going private and funding of public-to-private transaction..................................7c.Valuation of companies by financial analysts.................................................................9Answer 6....................................................................................................................................9a.Dividend payout policies.................................................................................................9b.Possible link between payout policy.............................................................................10b.Main findings of the Lintner’s 1956 study on dividend policy of the US corporations10c.Long-run underperformance of IPOs............................................................................11Reference..................................................................................................................................13
2FUNDAMENTALS OF CORPORATE FINANCEQuestion 1a.Difference among residual payout policy and managed payout policyResidual policy – the residual dividend policy is used by the management of any companyfor funding the capital expenditures with the available earnings before the payment ofdividend to the shareholders and the policy generates more volatility with respect to the dollaramount of the dividends that is paid to the investors in each year (Farre-Mensa, Michaely andSchmalz 2014). The main objective is to use the earnings to the capital expenditure withregard to the cash flows and the dividends are paid with the remaining earnings created by thecompany, if any.Example – suppose the earning of the company is $ 1,000 and has the debt/equity ratio of 0.5.Now if the company requires $ 900, for maintaining the debt/equity ratio, the company willrequire paying $ 300 through debt and $ 600 through equity. Therefore, the amount of ($1000 - $ 600) will be left for payment of dividend. Therefore, if the company requires theequity for any project that is more than the available levels with the company, the companywill have to issue new stock.Managed policy – managed dividend distribution policy is the commitment of the issuer tomake the fixed periodic payment of dividend. It states that the investors have the option tobuy the shares of any security along with the confidence that the investor will receive thereliable distribution rather than the constant changes in payment (Kanwal and Hameed 2017).Example – the company can choose to pay a fixed rate of dividend like $ 1 per shareirrespective of the profit level. Suppose the company earned huge profits during the quarter,the shareholders may still get dividend at the rate of $ 1 per share. In the same way when theprofits will be low, then also the shareholders will get the dividend at the same rate.
3FUNDAMENTALS OF CORPORATE FINANCEb.Findings of Lintern published during 1956 with regard to dividend policy The behavioural models for the dividend policy supposes that changes in the dividendpolicy can be stated by last period’s dividend and target dividend that can be expressed asfraction of the period’s earning. Lintner John (1956) conducted and surveyed the interview ofthe CFO of the firms in USA and recommended that past year dividend and current earningsare related with the behaviour of dividend payment (Andres et al. 2015). Dividend policy chosen by a firm determines the profitability of the dividendpayments for the investors and the stability of their income. However, in practice, the Uscompanies use the residual policies for payment of dividend. c.Academics meaning while it says companies cater to particular “payoutclientele”The effect of clientele states that the investors will hold the stocks whose policy fordividend is most preferable. It means to say, the investors prefer specific dividends over theunknown earnings of the future or others will prefer to have the current income rather thecapital gains (Murphy and Thirumalai 2016). Therefore, the particular dividend policy willencourage particular clientele to the stock. Therefore, while the academic say that thecompanies cater to the particular clientele for payout, it means that the companies will applythe dividend policy that will be more stable with respect to the effect of clientele.Question 2a.Main issues while making the initial public offering (IPO)Going public means the entrepreneur sells the ownership of her or his company underthe public market like stock exchange. Selling of the shares under the IPO is the elaborate
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