9 Dividend Policy
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Transcript of 9 Dividend Policy
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Dividend Policy
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Pembayaran Dividen TELKOM
Sumber: www.telkom.co.id
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What is distribution/dividend
policy?
The distribution policy defines:
The level of cash distributions to
shareholders Dividend Payout
The form of the distribution(dividend vs. stock repurchase)
The stability of the distribution
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Dividend Irrelevance Theory
Investors are indifferent betweendividends and retention-generated
capital gains. If they want cash,they can sell stock. If they dontwant cash, they can use cashdividends to buy stock.
Value of the Firms BasicEarning Power, Business Risk.
Merton Miller & Franco Modigliani.
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Bird-in-the-Hand Theory
Investors think dividends are less risky thanpotential future capital gains, hence they
like dividends. Investors prefer a high payout. Less certain
of capital gain.
If so, investors would value high payoutfirms more highly ke ??
i.e., a high payout would result in a high P0
Myron Gordon & John Lintner
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Tax Preference Theory
Investors prefer a low payout, hencegrowth. Capital Gains Are Preferred.
Low payouts mean higher capitalgains. Capital gains taxes are
deferred. Dividend Double taxation.
This could cause investors to preferfirms with low payouts, i.e., a high
payout results in a low P0.
Litzenberger & Rawaswamy
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Which theory is most correct?
Empirical testing has not been ableto determine which theory, if any, iscorrect.
Thus, managers use judgmentwhen setting policy.
Analysis is used, but it must be
applied with judgment.
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ESTABLISHING THE DIVIDENDPOLICY in PRACTICE
RESIDUAL DIVIDEND MODEL:Setting the Target Payout Ratio
4 steps:1. Determine the Optimal Capital Budget.2. Determine the Target Capital Structure
3. Use Retained Earnings FIRST to Supply Equity Requirement4. Pay Dividends only if earning is available
OPTIMAL PAYOUT RATIO
f { Investors preference, the firms investment opportunities,firms target capital structure, the availability and cost of external
capital }
See: Dallas Oil Company
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DALLAS OIL COMPANY
(RESIDUAL DIVIDEND POLICY)
Dallas Oil Company (selanjutnya disebut DOC) adalahperusahaan yang mencapai tahap dimana perusahaanmulai membutuhkan dana ekuitas dari luar untuktumbuh. Perusahaan juga ingin tetapmempertahankan target struktur modal 60% Ekuitas
dan 40% Utang. Manajemen DOC memutuskan untukGo Publicdan persyaratan keterbukaan informasimenyebabkan perusahaan harus memutuskan dasarpembagian deviden yang baik untuk tahun-tahunmendatang. DOC telah menyusun InvestmentOpportunity Schedule (IOS) dan Marginal Cost ofCapital (MCC) untuk skenario baik, normal dan buruk.
Jika tahun ini DOC memperoleh earning sebesar 60 MilyarRupiah, berapa porsi dari earning yang akan dibagikandalam bentuk dividend?
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%MIRR
New Capital ( Milyar Rupiah)400
30
28A
CB26
24
A
BC
ED
A
BC
D
MCC
20 EE
D
F
F
F
IOSBa
IOSN
IOSBu
15090
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Using the Residual Model to Calculate
Distributions Paid
Distr. = .Firms
EarningTargetequityratio
Totalcapitalbudget[ ]))((
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Advantages and Disadvantages of the
Residual Dividend Policy
Advantages: Minimizes new stock issuesand flotation costs.
Disadvantages: Results in variabledividends, sends conflicting signals,increases risk, and doesnt appeal to
any specific clientele.Conclusion: Consider residual policy
when setting target payout, but dont
follow it rigidly.
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Stock Repurchases
Reasons for repurchases:
As an alternative to distributing cash asdividends.
To dispose of one-time cash from an asset
sale. To make a large capital structure change.
Share EPS Price Capital Gain
Repurchases: Buying own stock backfrom stockholders.
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Advantages of Repurchases
Option for stockholders
Avoid setting a high payout ratio
Capital gain is tax preferable
Positive signal for stockholders,management thinks the stock is
undervalues
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Disadvantages of Repurchases
In practice, stockholders may not bewell informed
May be viewed as a negative signalas firm does not have goodinvestment opportunities
Firm may have bid up therepurchased price tooexpensive
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Stock Dividends vs. Stock Splits
Stock dividend: Firm issues newshares instead of giving cash
dividend. If 10%, get 10 shares foreach 100 shares owned.
Stock split: Firm increases thenumber of shares outstanding, say
2:1. Sends shareholders moreshares.
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Both stock dividends and stock splitsincrease the number of shares outstanding,so the pie is divided into smaller pieces.
Unless the stock dividend or split conveys
information, or is accompanied by anotherevent like higher dividends, the stock pr icefalls so as to keep each investors wealthunchanged.
But splits/stock dividends may get us to anoptimal price range.
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When should a firm consider
splitting its stock?
Stock splits can be used to keep the price inthe optimal range. Optimal Trading Range
Large # investors will be able topurchase the stock The Price of the Stockwill be Maximized
Increase Liquidity
Stock splits generally occur whenmanagement is confident, so areinterpreted as posi t ive signals.
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Soldwithoutdividend