Mini Case Chapter 17
Mini Case Study
Chapter 17
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This assignment case was completed by me withouth any assistance
____________________________
A. 1) What is meant by the term “distribution policy”? How have dividend payout versus stock repurchase changed over time?
Distribution Policy involves three issues. 1) What fraction of earnings should be distributed? 2) Should the distribution be in the form of cash dividends or stock repurchases? 2) Should the firms maintain a steady, stable divided growth rate?
The dividend payout versus stock repurchase has changed dramatically during the past 30 years. First off the total cash distributions as a percentage of net income have remained the same fairly stable at around 26% to 28%, but the mix of dividends and repurchases has changed. The average dividend payout fell from 22.3% in 1974 to 13.8% in 1998, while the average repurchase payouts as a percentage of net income rose from 3.7% to 13.6%. Since 1985, large companies have repurchased more shares than they have issued. Ever since 1998, more cash has been returned to shareholders in repurchases then as dividend payouts. Second, companies today are less likely to pay a dividend. In 1978, about 66.5% of NYSE, AMEX, and Nasdaq firms paid a dividend. In 1999, only 20.8% paid a dividend. A portion of this reduction can be explained by the larger number of IPO’s in the 1990’s, since young firms rarely pay a dividend. Even though that doesn’t explain the whole story, as many mature firms now don’t pay dividends. Third is that relatively small number of older, more established, and more profitable firms accounts for most of the cash distributed as dividends and finally there is a considerable variation in distribution policies, as some companies pay a high percentage of their income as dividends and some pay none. 2) The terms “irrelevance,” and “dividend preference, or bird-in-the-hand,” and “tax effects” have been used to describe three major theories regarding the way dividend payout
Chapter 17
By:
This assignment case was completed by me withouth any assistance
____________________________
A. 1) What is meant by the term “distribution policy”? How have dividend payout versus stock repurchase changed over time?
Distribution Policy involves three issues. 1) What fraction of earnings should be distributed? 2) Should the distribution be in the form of cash dividends or stock repurchases? 2) Should the firms maintain a steady, stable divided growth rate?
The dividend payout versus stock repurchase has changed dramatically during the past 30 years. First off the total cash distributions as a percentage of net income have remained the same fairly stable at around 26% to 28%, but the mix of dividends and repurchases has changed. The average dividend payout fell from 22.3% in 1974 to 13.8% in 1998, while the average repurchase payouts as a percentage of net income rose from 3.7% to 13.6%. Since 1985, large companies have repurchased more shares than they have issued. Ever since 1998, more cash has been returned to shareholders in repurchases then as dividend payouts. Second, companies today are less likely to pay a dividend. In 1978, about 66.5% of NYSE, AMEX, and Nasdaq firms paid a dividend. In 1999, only 20.8% paid a dividend. A portion of this reduction can be explained by the larger number of IPO’s in the 1990’s, since young firms rarely pay a dividend. Even though that doesn’t explain the whole story, as many mature firms now don’t pay dividends. Third is that relatively small number of older, more established, and more profitable firms accounts for most of the cash distributed as dividends and finally there is a considerable variation in distribution policies, as some companies pay a high percentage of their income as dividends and some pay none. 2) The terms “irrelevance,” and “dividend preference, or bird-in-the-hand,” and “tax effects” have been used to describe three major theories regarding the way dividend payout