Chapter 17

Payout Policy
Book Cover
10e

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rightsreserved
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 Topics Covered
17.1 How Corporations Pay Out Cash to
Shareholders.
17.2 The Information Content of Dividends
and Repurchases.
17.3 Dividends or Repurchases? The Payout
Controversy.
17.4 Why Dividends May Increase Value.
17.5 Why Dividends May Reduce Value.
17.6 Payout Policy and the Life Cycle of the
Firm.
17 - 2
Dividend and Stock Repurchases

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17 - 3
 Cash Dividends

 Regular cash dividend – cash payments made directly to

stockholders, usually each quarter
 Extra cash dividend – indication that the “extra” amount
may not be repeated in the future
 Special cash dividend – similar to extra dividend, but
definitely will not be repeated
 Liquidating dividend – some or all of the business has
been sold
 Stock dividend？
– No cash leaves the firm.
– The firm increases the number of shares outstanding

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Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 5
 臺灣股利政策

 在臺灣，過去公司一年只發放一次股利
 2018年7月6日立法院三讀通過之公司法增定
228-1條文
– 「公司章程得訂明盈餘分派或虧損撥補於每季或每
半會計年度終了後為之。…」
– 允許一季或半年發放一次股利

 誰是臺灣第一個按季發放公司？

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為何稱為「股王條款」？

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 Dividend Payment

 Declaration Date (宣告日) – Board declares the dividend,

and it becomes a liability of the firm
 Ex-dividend Date (除息日)
 Occurs two business days before date of record
 If you buy stock on or after this date, you will not
receive the dividend.
 Stock price generally drops by about the amount of the
dividend.
 Date of Record (登記日) – holders of record are
determined, and they will receive the dividend payment
 Date of Payment (發放日) – checks are mailed

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Procedure for Cash Dividend

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Example

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 臺灣股利支付程序

 宣告日 (Declaration Date)

– 指當股利發放的議案送至股東會後，即由股東會予
以表決；如獲出席過半數股東同意表決通過，則可
宣布發放現金股利。
 臺灣股票買賣需於買進(賣出)後T+2營業日完成
過戶(俗稱交割：買股付錢，賣股給股)

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 臺灣股利支付程序

 除息日 (Ex-dividend date)

– 除息日為登記基準日往前算起的第6個營業日，在除息日
以前已完成股票交易並於停止過戶日前辦理過戶的買方，
才享有分配現金股利的權利；若交易發生在除息日當天及
以後，則股利仍歸股票賣方所有。
 登記基準日 (Record Date)
– 公司在最後過戶日（即2月11日）結束後，會終止股票所
有權的移轉作業，停止過戶5日（2月12日～2月16日），
並以登記基準日（即2月16日）當天的股東名冊，作為在3
月15日支付現金股利的依據。
– 這段時間仍可以買賣股票，只是無法交割，以2/9當天買
賣股且2/11完成交割的股東會作為2/16股東名冊領取股利
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 臺灣股利支付程序

 支付日 (Payment)
– 當股東名冊登錄作業完成後，即確定股利發放對象。
支付日是指公司會將股利支票寄給已列名於股東名
冊上的股東，完成整個股利發放作業。
– 實務上會隔好幾個月

 TSE除權除息預告表
https://www.twse.com.tw/zh/page/trading/exch
ange/TWT48U.html

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Price Behavior around the Ex-
Dividend Date

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Warrior Met Coal distribute 11.21
special dividend on Nov. 24

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Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 17
18 1. Green Roof Motels has more cash on hand than its operations require. Thus, the firm has
decided to pay out some of its earnings in the form of cash to its shareholders. What are
these payments to shareholders called?
A. dividends
B. stock payments
C. repurchases
D. payments-in-kind
E. stock splits
2. Lester's Frozen Foods just paid out $0.50 a share to its shareholders. The cash for these
payments came from a large sale of assets, not from any earnings of the firm. What are
these payments to shareholders called?
A. dividends
B. distributions
C. repurchases
D. payments-in-kind
E. stock splits
8. Which one of the following refers to the ability of shareholders to undo a firm's dividend
policy and create an alternative dividend policy by reinvesting dividends or selling shares
of stock?
A. perfect foresight model
B. personalization
C. recapitalization
D. offsetting leverage
E. homemade dividend policy Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 18
19 1. Green Roof Motels has more cash on hand than its operations require. Thus, the firm has
decided to pay out some of its earnings in the form of cash to its shareholders. What are
these payments to shareholders called?
A. dividends
B. stock payments
C. repurchases
D. payments-in-kind
E. stock splits
2. Lester's Frozen Foods just paid out $0.50 a share to its shareholders. The cash for these
payments came from a large sale of assets, not from any earnings of the firm. What are
these payments to shareholders called?
A. dividends
B. distributions
C. repurchases
D. payments-in-kind
E. stock splits
8. Which one of the following refers to the ability of shareholders to undo a firm's dividend
policy and create an alternative dividend policy by reinvesting dividends or selling shares
of stock?
A. perfect foresight model
B. personalization
C. recapitalization
D. offsetting leverage
E. homemade dividend policy Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 19
20 56. On July 7, you purchased 500 shares of Wagoneer, Inc. stock for $21 a share. On August 1,
you sold 200 shares of this stock for $28 a share. You sold an additional 100 shares on
August 17 at a price of $25 a share. The company declared a $0.95 per share dividend on
August 4 to holders of record as of Wednesday, August 15. This dividend is payable on
September 1. How much dividend income will you receive on September 1 as a result of
your ownership of Wagoneer stock?

57. Webster United is paying a $1.10 per share dividend today. There are 350,000 shares
outstanding with a market price of $25 per share. Ignore taxes. Before the dividend, the
company had earnings per share of $1.74. As a result of this dividend, the:
A. retained earnings will decrease by $350,000.
B. retained earnings will increase by $385,000.
C. total firm value will not change.
D. earnings per share will increase to $2.84.
E. price-earnings ratio will be 13.74.

58. You own 2,200 shares of Deltona Hardware. The company has stated that it plans on
issuing a dividend of $0.42 a share at the end of this year and then issuing a final
liquidating dividend of $2.90 a share at the end of next year. Your required rate of return
on this security is 16 percent. Ignoring taxes, what is the value of one share of this stock to
you today?

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21 56. On July 7, you purchased 500 shares of Wagoneer, Inc. stock for $21 a share. On August 1,
you sold 200 shares of this stock for $28 a share. You sold an additional 100 shares on
August 17 at a price of $25 a share. The company declared a $0.95 per share dividend on
August 4 to holders of record as of Wednesday, August 15. This dividend is payable on
September 1. How much dividend income will you receive on September 1 as a result of
your ownership of Wagoneer stock?
Dividend received = $0.95 × (500 - 200) = $285
57. Webster United is paying a $1.10 per share dividend today. There are 350,000 shares
outstanding with a market price of $25 per share. Ignore taxes. Before the dividend, the
company had earnings per share of $1.74. As a result of this dividend, the:
A. retained earnings will decrease by $350,000.
B. retained earnings will increase by $385,000.
C. total firm value will not change.
D. earnings per share will increase to $2.84.
E. price-earnings ratio will be 13.74.
Price-earnings ratio after the dividend = ($25 - $1.10)/$1.74 = 13.74

58. You own 2,200 shares of Deltona Hardware. The company has stated that it plans on
issuing a dividend of $0.42 a share at the end of this year and then issuing a final
liquidating dividend of $2.90 a share at the end of next year. Your required rate of return
on this security is 16 percent. Ignoring taxes, what is the value of one share of this stock to
you today?
Value per share = ($0.42/1.161) + ($2.90/1.162) = $2.52
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Dividend Decision Survey
Dividend Decision Survey (2005)

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17 - 22
 Does Dividend Policy Matter?

 Dividends matter – the value of the stock is based

on the present value of expected future
dividends.

 Dividend policy may not matter

 Dividend policy is the decision to pay dividends versus
retaining funds to reinvest in the firm.
 In theory, if the firm reinvests capital now, it will grow
and can pay higher dividends in the future.

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Irrelevance of Dividend Policy (MM)

 Also presented by Modigliani-Miller (MM).

 Dividend policy is irrelevant.
 It doesn’t affect a firm’s value or stock price or its
cost of capital.
 Thus, there’s no optimal dividend policy – one
dividend policy is as good as any other.
 與資本結構一樣，MM認為沒有最佳股利政策

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 Assumptions

 There are no taxes.

 There are no flotation or transaction costs.
 No single participant can affect the market price of the
security through his trades. A
 The firm’s investment policy is independent of its dividend
policy.
 All individuals have the same beliefs concerning future
investments, profits, & dividends (i.e. have homogeneous
expectations).
 Investors & managers have the same set of information
(symmetric information) regarding future investment
opportunities.

2
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 Illustration

 Wharton Corporation is an all-equity firm with 100 shares

outstanding.
 The required rate of return on the stock (rS) is 10%.
 The managers know at the present time (date 0) that the
firm will dissolve in 2 year (date 2).
 At date 0 the managers are able to forecast cash flows
with perfect certainty.
 The firm will receive a cash flow of $10,000 immediately
and another $10,000 next year.

2
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 Current policy: Dividends set equal to cash flow

– At the current time, total dividends at each date are set

equal to the cash flow of $10,000 (i.e. each share has $100
dividend).
The current value of each share:
𝐷1 𝐷2 $100 $100
𝑃0 = 1 + 2 = 1 + 2 = 173.55
(1 + 𝑅) (1 + 𝑅) (1.10) (1.10)
The firm is worth 100×173.55=17,355

17 - 27
 Alternative policy: Initial dividend > cash flow

– Another policy is for the firm to pay a total dividend of

$11,000 immediately (i.e. each share has $110 dividend
immediately).
– Because the cash runoff is only $10,000, the extra $1,000
#$100E
must be raised.
– Assume that the stock (or debt) is issued and the new
stockholders will desire enough cash flow at Date 2 to let
them earn the required 10% return on their Date 1
investment.

17 - 28
 – The new stockholders will demand $1,100 [= $1,000(1 +
- 10%)] of the Date 1 cash flow, leaving only $8,900 (=
$10,000 − $1,100) to the old stockholders at Date 2.
– Note: Because the new stockholders buy at Date 1, their
only dividend is at Date 2.

 The dividends to the old stockholders:

Date 1 Date 2
1. 10
Aggregate dividends $11,000 $8,900 = 11 ,
000 -

Dividends per share $110.0 $89.0

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 The current value of each share:
$110 $89
𝑃0 = 1
+ 2
= 173.55
(1.10) (1.10)

 If a firm pays higher dividends, it must sell more stock to new

investors, and the value of the stock given up to new
investors is exactly equal to the dividends paid out.

#T
 The change in dividend policy did not affect the value of a
share of stock (i.e. dividend policy does not matter).

17 - 30
 Homemade Dividends

 Suppose individual investor X prefers dividends per share

of $100 at both Dates 1 & 2.

 Would he be disappointed when informed that the firm’s

management is adopting the alternative dividend policy
(dividends of $110 and $89 on the two dates, respectively)?

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 Not necessarily, because he could easily reinvest the $10 of
unneeded funds received on Date 1, yielding an incremental
return of $11 ($10×(1+10%)=$11) at Date 2.

 Thus, he would receive his desired net cash flow of $110 - $10
= $100 at Date 1 and $89 + $11 = $100 at Date 2.

 Conversely, imagine investor Z preferring $110 of cash flow at

Date 1 and $89 of cash flow at Date 2, who finds that
management will pay dividends of $100 at both Dates 1 and 2.
 Here he can sell off shares of stock at Date 1 to receive the
desired amount of cash flow.

17 - 32
 That is, if he sells $10 worth of stock at Date 1 to boost his
total cash at Date 1 of $110
 Because a sale of $10 stock at date 1 will reduce his dividends
by $11 (= 1.1  $10) at Date 2, his net cash flow at Date 2
would be $100 - $11 = $89.
 The example illustrates how investors can make homemade
dividends.

17 - 33
 In this instance, corporate dividend policy is being
undone by a potentially dissatisfied stockholder who
either reinvests dividends or sells off stock.
F
 Dividend policy is irrelevant (i.e.
investors are indifferent to corporate
dividend policy).

17 - 34
 A Test (Zuvio)

* *
Dividends are irrelevant Dividend policy is irrelevant
 True v True

~ False
  False

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36 59. Al owns 800 shares of The Good Life Co. The company recently issued a statement that it
will pay a dividend per share of $0.55 this year and a $0.60 per share dividend next year.
Al does not want any dividend income this year but does want as much dividend income
as possible next year. Al earns 9 percent on his investments. Ignoring taxes, what will Al's
total homemade dividend be next year?

60. Jenningston Mills has a market value equal to its book value. Currently, the firm has
excess cash of $1,200, other assets of $5,800, and equity valued at $3,750. The firm has
250 shares of stock outstanding and net income of $420. What will the new earnings per
share be if the firm uses 25 percent of its excess cash to complete a stock repurchase?

61. Blasco's has a market value equal to its book value. Currently, the firm has excess cash of
$1,332, other assets of $11,674, and equity of $7,200. The firm has 1,200 shares of stock
outstanding and net income of $838. Blasco's has decided to spend one-third of its excess
cash on a share repurchase program. How many shares of stock will be outstanding after
the stock repurchase is completed?

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37 59. Al owns 800 shares of The Good Life Co. The company recently issued a statement that it
will pay a dividend per share of $0.55 this year and a $0.60 per share dividend next year.
Al does not want any dividend income this year but does want as much dividend income
as possible next year. Al earns 9 percent on his investments. Ignoring taxes, what will Al's
total homemade dividend be next year?
Homemade dividend income for next year = [($0.55 × 1.09) + $0.60] × 800 = $959.60

60. Jenningston Mills has a market value equal to its book value. Currently, the firm has
excess cash of $1,200, other assets of $5,800, and equity valued at $3,750. The firm has
250 shares of stock outstanding and net income of $420. What will the new earnings per
share be if the firm uses 25 percent of its excess cash to complete a stock repurchase?
Price per share = $3,750/250 = $15 Number of shares repurchased = (0.25 × $1,200)/$15 =
20 shares New EPS = $420/(250 - 20) = $1.83

61. Blasco's has a market value equal to its book value. Currently, the firm has excess cash of
$1,332, other assets of $11,674, and equity of $7,200. The firm has 1,200 shares of stock
outstanding and net income of $838. Blasco's has decided to spend one-third of its excess
cash on a share repurchase program. How many shares of stock will be outstanding after
the stock repurchase is completed?
Price per share = $7,200/1,200 = $6 Number of shares repurchased = [(1/3) × $1,332]/$6 =
74 New number of shares outstanding = 1,200 - 74 = 1,126 shares

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38 63. The equity of Blooming Roses has a total market value of $16,000. Currently, the firm has
excess cash of $1,400 and net income of $15,400. There are 750 shares of stock
outstanding. What will be the percentage change in the stock price per share if the firm
pays out all of its excess cash as a cash dividend?

65. Josh's, Inc. has 7,000 shares of stock outstanding with a par value of $1.00 per share and a
market value of $32 a share. The balance sheet shows $82,000 in the capital in excess of
par account, $7,000 in the common stock account, and $64,800 in the retained earnings
account. The firm just announced a 10 percent stock dividend. What is the value of the
capital in excess of par account after the dividend?

66. Randall's, Inc. has 20,000 shares of stock outstanding with a par value of $1.00 per share.
The market value is $12 per share. The balance sheet shows $42,000 in the capital in
excess of par account, $20,000 in the common stock account, and $50,500 in the retained
earnings account. The firm just announced a 5 percent (small) stock dividend. What will
the balance in the retained earnings account be after the dividend?

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39 63. The equity of Blooming Roses has a total market value of $16,000. Currently, the firm has
excess cash of $1,400 and net income of $15,400. There are 750 shares of stock
outstanding. What will be the percentage change in the stock price per share if the firm
pays out all of its excess cash as a cash dividend?
Price per share before cash dividend = $16,000/750 = $21.33 Price per share after cash
dividend = ($16,000 - $1,400)/750 = $19.47 Percentage change in price = ($19.47 -
$21.33)/$21.33 = -8.75 percent

65. Josh's, Inc. has 7,000 shares of stock outstanding with a par value of $1.00 per share and a
market value of $32 a share. The balance sheet shows $82,000 in the capital in excess of
par account, $7,000 in the common stock account, and $64,800 in the retained earnings
account. The firm just announced a 10 percent stock dividend. What is the value of the
capital in excess of par account after the dividend?
Change in capital in excess of par = (7,000 shares × 0.10) × ($32 - $1) = $21,700 New capital
in excess of par account balance = $82,000 + $21,700 = $103,700

66. Randall's, Inc. has 20,000 shares of stock outstanding with a par value of $1.00 per share.
The market value is $12 per share. The balance sheet shows $42,000 in the capital in
excess of par account, $20,000 in the common stock account, and $50,500 in the retained
earnings account. The firm just announced a 5 percent (small) stock dividend. What will
the balance in the retained earnings account be after the dividend?
Retained earnings = [(20,000 shares × 0.05) × $12 × -1] + $50,500 = $38,500

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 Low Payout Please

 Why might a low payout be desirable?

E
 Individuals in upper income tax brackets might prefer
lower dividend payouts, given the immediate tax
liability, in favor of higher capital gains with the
deferred tax liability. (高所得級距的人偏好低股利)
: FS
 Flotation costs – low payouts can decrease the amount
of capital that needs to be raised, thereby lowering
flotation costs. (若公司為了發股籌資，則發行成本
較高)
 Dividend restrictions – debt contracts might limit the
percentage of income that can be paid out as
dividends. (有些債務會有股利限制條款)

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 High Payout Please

 Why might a high payout be desirable?

 Desire for current income
• Individuals that need current income, i.e., retirees
• Groups that are prohibited from spending principal (trusts
and endowments) (一鳥在手理論，每季發放股利vs每年
發放) # I PrTEAM
 Uncertainty resolution – no guarantee that the higher
future dividends will materialize
 Taxes
• Dividend exclusion for corporations (企業投資的股利免稅
額高)
• Tax-exempt investors don’t have to worry about differential
treatment between dividends and capital gains.

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 Dividends and Signals

 Asymmetric information – managers have more

information about the health of the company
than investors
 理論上股利多寡不影響公司價值，實際上因為
存在資訊不對稱，股利的變動具有強烈資訊意
涵

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 Dividends and Signals

 Changes in dividends convey information

 Dividend increases
• Management believes it can be sustained
• Expectation of higher future dividends, increasing present
value
• Signal of a healthy, growing firm
 Dividend decreases
• Management believes it can no longer sustain the current
level of dividends
• Expectation of lower dividends indefinitely; decreasing
present value
• Signal of a firm that is having financial difficulties
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Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 44
Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 45
Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 46
 Clientele Effect

 Some investors prefer low dividend payouts and will buy

stock in those companies that offer low dividend payouts.

 Some investors prefer high dividend payouts and will buy

stock in those companies that offer high dividend payouts.

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Implications of the Clientele Effect

 What do you think will happen if a firm changes

its policy from a high payout to a low payout?

 What do you think will happen if a firm changes

its policy from a low payout to a high payout?

 If this is the case, does dividend policy matter?

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 支持股利政策無關論的其他論點

 顧客效果
– 2015年初，鴻海外資股東貝萊德(BlackRock)曾對公司提出
請求，有鑑於鴻海當時近5年股利發放率平均僅18%，遠
低於同業60%，希望鴻海可以調高股利，同年，鴻海便從
善如流地立即配發3.8元現金股利與0.5元股票股利，換算
股利發放率大增為49%(現金股利發放率為43%)
• 2014/12/31 郭董麻煩了？傳貝萊德等大股東要求漲股利、策略透
明 (https://ppt.cc/fetLlx)
• 2015/1/1 美媒︰外資聯手 要鴻海加發股利 (https://ppt.cc/f1FrXx)
• 2015/1/13貝萊德伸手 向郭董討現金股息 (https://ppt.cc/fvSEox)
– 為何鴻海要聽貝萊德的意見？ (持股2.6%、全球最大基金
公司)

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 鴻海(2317)股利政策 1990-2017

6
現金股利
5 股票股利

0
1990 1995 2000 2005 2010 2015

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 鴻海(2317)股利發放率 1992-2017

90
現金股利率(%)
80 股票股利率(%)
70

60

50

40

30

20

10

0
1992 1997 2002 2007 2012 2017

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 Catering Theory

 迎合理論 (Catering Theory)

– Baker and Wurgler (2004)提出，當市場上的投資人比較喜歡發
放現金股利的公司時，公司會傾向多發現金；當市場上的投
資人比較不喜歡發放現金股利的公司時，公司會傾向少發現
金

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有發股利跟沒發股利公司價值趨勢圖

有發股
利公司
價值 沒發股
利公司
價值

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有發股利公司比沒發股利公司溢酬趨勢圖

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股利溢酬與「初發」股利關係

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569. What is the information content effect?
A. any type of new information that causes a firm to cease paying dividends
B. any news announcement that was anticipated and thus produces no reaction from investors
C. the primary contributing data that helps directors determine the amount of a particular dividend
payment
D. any type of reaction from a shareholder in response to a news announcement related to the stock
issuer
E. the financial market's reaction to a change in the amount of a firm's dividend
10. The common stock of Pierson Enterprises has historically had a high dividend yield and is
expected to continue to do so. As a result, the majority of its shareholders are individuals and
entities that are seeking a regular source of cash income. Most of these shareholders pay
either no taxes or a relatively low amount of taxes. The fact that most of these shareholders
have similar characteristics is referred to by which one of the following terms?
A. information content effect
B. clientele effect
C. efficient markets hypothesis
D. distribution effect
E. market reaction effect
30. The information content of a dividend increase generally signals that:
A. the firm has a one-time surplus of cash.
B. the firm has few, if any, net present value projects to pursue.
C. management believes earnings growth will be strong going forward.
D. the firm has more cash than it needs due to a decline in future orders.
Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 56
E. dividends thereafter will be lower.
57 9. What is the information content effect?
A. any type of new information that causes a firm to cease paying dividends
B. any news announcement that was anticipated and thus produces no reaction from investors
C. the primary contributing data that helps directors determine the amount of a particular
dividend payment
D. any type of reaction from a shareholder in response to a news announcement related to the
stock issuer
E. the financial market's reaction to a change in the amount of a firm's dividend
10. The common stock of Pierson Enterprises has historically had a high dividend yield and is
expected to continue to do so. As a result, the majority of its shareholders are individuals and
entities that are seeking a regular source of cash income. Most of these shareholders pay
either no taxes or a relatively low amount of taxes. The fact that most of these shareholders
have similar characteristics is referred to by which one of the following terms?
A. information content effect
B. clientele effect
C. efficient markets hypothesis
D. distribution effect
E. market reaction effect
30. The information content of a dividend increase generally signals that:
A. the firm has a one-time surplus of cash.
B. the firm has few, if any, net present value projects to pursue.
C. management believes earnings growth will be strong going forward.
D. the firm has more cash than it needs due to a decline in future orders.
E. dividends thereafter will be lower. Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 57
40. Which one of the following statements appears to be supported by the current dividend
policies of U.S. industrial firms?
A. Firms tend to increase the dividend amount per share, even when it's unclear if the increase can
be maintained.
B. Investors no longer react to changes, either up or down, in dividends.
C. Newer, high-growth firms tend to pay larger dividends than mature firms.
D. Dividends are still viewed by shareholders as a signal of a firm's future outlook.
E. Managers are no longer hesitant to lower dividend payments

41. Which one of the following statements is correct?

A. Firms prefer to cut dividend payments rather than borrow money to fund a short-term cash
need.
B. Share repurchases tend to increase agency costs.
C. Maintaining a steady dividend is a key goal of most dividend-paying firms.
D. Tax rates are the key factor in determining a firm's dividend policy.
E. Stock prices tend to ignore expected changes in dividend payments.

47. Which two of the following are the best justifications for a reverse stock split?
I. combine a reverse stock split with a stock repurchase to enable a firm to go dark
II. increase the respectability of the stock
III. avoid delisting
IV. reduce transaction costs for shareholders

Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 58

59
40. Which one of the following statements appears to be supported by the current dividend
policies of U.S. industrial firms?
A. Firms tend to increase the dividend amount per share, even when it's unclear if the increase can
be maintained.
B. Investors no longer react to changes, either up or down, in dividends.
C. Newer, high-growth firms tend to pay larger dividends than mature firms.
D. Dividends are still viewed by shareholders as a signal of a firm's future outlook.
E. Managers are no longer hesitant to lower dividend payments

41. Which one of the following statements is correct?

A. Firms prefer to cut dividend payments rather than borrow money to fund a short-term cash
need.
B. Share repurchases tend to increase agency costs.
C. Maintaining a steady dividend is a key goal of most dividend-paying firms.
D. Tax rates are the key factor in determining a firm's dividend policy.
E. Stock prices tend to ignore expected changes in dividend payments.

47. Which two of the following are the best justifications for a reverse stock split?
I. combine a reverse stock split with a stock repurchase to enable a firm to go dark
II. increase the respectability of the stock
III. avoid delisting
IV. reduce transaction costs for shareholders
I and III only
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 Stock Repurchase
It EEBSA
 Company buys back its own shares of stock
 Tender offer – company states a purchase price and a
desired number of shares
 Open market – buys stock in the open market
 Targeted purchased – from specific stockholders
 Similar to a cash dividend in that it returns cash
from the firm to the stockholders
– One time cash flow
– Tax is different
 This is another argument for dividend policy
irrelevance in the absence of taxes or other
imperfections.
Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 60
Stock Repurchase versus Dividend

Consider a firm that wishes to distribute $300,000 to its

shareholders. NI=$49,000
Assets Liabilities & Equity
A.Original balance sheet
Cash $300,000 Debt 0
Other Assets 700,000 Equity 1,000,000
Value of Firm 1,000,000 Value of Firm 1,000,000
Shares outstanding = 100,000
Price per share= $1,000,000 /100,000 = $10
EPS=49,000/100,000=0.49
P/E=10/0.49=20.4
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Stock Repurchase versus Dividend

If they distribute the $300,000 as a cash dividend, the

balance sheet will look like this:
Assets Liabilities & Equity
B. After $3 per share cash dividend
Cash $ 0 Debt 0
Other Assets 700,000 Equity 700,000
Value of Firm 700,000 Value of Firm 700,000
Shares outstanding = 100,000
Price per share = $700,000/100,000 = $7
Investor owns 100 shares: 700+300=1,000 (the same)
EPS=49,000/100,000=0.49 P/E=7/0.49=14.3
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Stock Repurchase versus Dividend

If they distribute the $300,000 (30,000 shares) through a

stock repurchase, the balance sheet will look like this:
Assets Liabilities & Equity
C. After stock repurchase
Cash $ 0 Debt 0
Other Assets 700,000 Equity 700,000
Value of Firm 700,000 Value of Firm 700,000
Shares outstanding= 70,000
Price per share = $700,000 / 70,000 = $10
Investor owns 100 shares: 700+300=1,000 (sell)
Investor owns 100 shares: 100×10=1,000 (not sell)
EPS=49,000/70,000=0.7 P/E=10/0.7=14.3
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 Cash dividend vs. Repurchase

 The same
– Reduce total assets (equity)
– Reduce P/E ratio
 Different
– Repurchase won’t change price per share. Cash dividend will
reduce price per share
– Repurchase will increase earnings per share

Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 64

 Real-World Considerations

 Stock repurchase allows investors to decide if

they want the current cash flow and associated
tax consequences.

 Given our tax structure, repurchases may be

more desirable due to the options provided
stockholders.

 The IRS recognizes this and will not allow a stock

repurchase for the sole purpose of allowing
7 ADE E
investors to avoid taxes.

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Disappear Dividend vs Substitution
Theory

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Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 67
Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 68
2003年股利個人所得稅率由38%降至15%

Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 69

 臺灣股利相關稅率

• 台灣目前尚未對資本利得課稅，不少上市公司便利用
此一租稅上的優勢，以股票購回的方式將現金分配予
股東，而非現金股利，可節省股利所得稅。
• 證所稅：大戶條款，名存實亡
 兩稅合一制度的沿革
– 「兩稅合一」制度亦對企業之股利政策產生若干影
響。兩稅合一所採取的稅制為「設算扣抵法」，即
公司所繳納的所得稅得用以扣抵股東的所得稅。
1998起實施，原先可100%扣抵，2015年後僅可半數
(50%)扣抵，2018年取消。
– 本來精神是一隻羊不能扒兩層皮，在臺灣股票投資
人，一隻羊被扒三層皮
Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 70
 Information Content of Stock
Repurchases

 Stock repurchases send a positive signal that

management believes the current price is low.

 Tender offers send a more positive signal than open

market repurchases because the company is stating a
specific price.

 The stock price often increases when repurchases are

announced.

Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 71

What We Know and Do Not Know

 Corporations “smooth” dividends.

 Dividends provide information to the market.

 Firms should follow a sensible dividend policy:

– Don’t forgo positive NPV projects just to pay a
dividend.
– Avoid issuing stock to pay dividends.
– Consider share repurchase when there are few better
uses for the cash.

Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 72

 Putting It All Together

 Aggregate payouts are massive and have

increased over time.

 Dividends are concentrated among a small

number of large, mature firms.

 Managers are reluctant to cut dividends.

 Managers smooth dividends.

 Stock prices react to unanticipated changes in

dividends.

Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 73

Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 74
75 59. Al owns 800 shares of The Good Life Co. The company recently issued a statement that it
will pay a dividend per share of $0.55 this year and a $0.60 per share dividend next year.
Al does not want any dividend income this year but does want as much dividend income
as possible next year. Al earns 9 percent on his investments. Ignoring taxes, what will Al's
total homemade dividend be next year?

60. Jenningston Mills has a market value equal to its book value. Currently, the firm has
excess cash of $1,200, other assets of $5,800, and equity valued at $3,750. The firm has
250 shares of stock outstanding and net income of $420. What will the new earnings per
share be if the firm uses 25 percent of its excess cash to complete a stock repurchase?

61. Blasco's has a market value equal to its book value. Currently, the firm has excess cash of
$1,332, other assets of $11,674, and equity of $7,200. The firm has 1,200 shares of stock
outstanding and net income of $838. Blasco's has decided to spend one-third of its excess
cash on a share repurchase program. How many shares of stock will be outstanding after
the stock repurchase is completed?

Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 75

76 59. Al owns 800 shares of The Good Life Co. The company recently issued a statement that it
will pay a dividend per share of $0.55 this year and a $0.60 per share dividend next year.
Al does not want any dividend income this year but does want as much dividend income
as possible next year. Al earns 9 percent on his investments. Ignoring taxes, what will Al's
total homemade dividend be next year?
Homemade dividend income for next year = [($0.55 × 1.09) + $0.60] × 800 = $959.60

60. Jenningston Mills has a market value equal to its book value. Currently, the firm has
excess cash of $1,200, other assets of $5,800, and equity valued at $3,750. The firm has
250 shares of stock outstanding and net income of $420. What will the new earnings per
share be if the firm uses 25 percent of its excess cash to complete a stock repurchase?
Price per share = $3,750/250 = $15 Number of shares repurchased = (0.25 × $1,200)/$15 =
20 shares New EPS = $420/(250 - 20) = $1.83

61. Blasco's has a market value equal to its book value. Currently, the firm has excess cash of
$1,332, other assets of $11,674, and equity of $7,200. The firm has 1,200 shares of stock
outstanding and net income of $838. Blasco's has decided to spend one-third of its excess
cash on a share repurchase program. How many shares of stock will be outstanding after
the stock repurchase is completed?
Price per share = $7,200/1,200 = $6 Number of shares repurchased = [(1/3) × $1,332]/$6 =
74 New number of shares outstanding = 1,200 - 74 = 1,126 shares

Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 76

77 63. The equity of Blooming Roses has a total market value of $16,000. Currently, the firm has
excess cash of $1,400 and net income of $15,400. There are 750 shares of stock
outstanding. What will be the percentage change in the stock price per share if the firm
pays out all of its excess cash as a cash dividend?

65. Josh's, Inc. has 7,000 shares of stock outstanding with a par value of $1.00 per share and a
market value of $32 a share. The balance sheet shows $82,000 in the capital in excess of
par account, $7,000 in the common stock account, and $64,800 in the retained earnings
account. The firm just announced a 10 percent stock dividend. What is the value of the
capital in excess of par account after the dividend?

66. Randall's, Inc. has 20,000 shares of stock outstanding with a par value of $1.00 per share.
The market value is $12 per share. The balance sheet shows $42,000 in the capital in
excess of par account, $20,000 in the common stock account, and $50,500 in the retained
earnings account. The firm just announced a 5 percent (small) stock dividend. What will
the balance in the retained earnings account be after the dividend?

Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 77

78 63. The equity of Blooming Roses has a total market value of $16,000. Currently, the firm has
excess cash of $1,400 and net income of $15,400. There are 750 shares of stock
outstanding. What will be the percentage change in the stock price per share if the firm
pays out all of its excess cash as a cash dividend?
Price per share before cash dividend = $16,000/750 = $21.33 Price per share after cash
dividend = ($16,000 - $1,400)/750 = $19.47 Percentage change in price = ($19.47 -
$21.33)/$21.33 = -8.75 percent

65. Josh's, Inc. has 7,000 shares of stock outstanding with a par value of $1.00 per share and a
market value of $32 a share. The balance sheet shows $82,000 in the capital in excess of
par account, $7,000 in the common stock account, and $64,800 in the retained earnings
account. The firm just announced a 10 percent stock dividend. What is the value of the
capital in excess of par account after the dividend?
Change in capital in excess of par = (7,000 shares × 0.10) × ($32 - $1) = $21,700 New capital
in excess of par account balance = $82,000 + $21,700 = $103,700

66. Randall's, Inc. has 20,000 shares of stock outstanding with a par value of $1.00 per share.
The market value is $12 per share. The balance sheet shows $42,000 in the capital in
excess of par account, $20,000 in the common stock account, and $50,500 in the retained
earnings account. The firm just announced a 5 percent (small) stock dividend. What will
the balance in the retained earnings account be after the dividend?
Retained earnings = [(20,000 shares × 0.05) × $12 × -1] + $50,500 = $38,500

Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 78

The Management View of Dividend
Policy
 Agree or Strongly Agree
 93.8% Try to avoid reducing dividends per share
 89.6% Try to maintain a smooth dividend from year to
year
 41.7% Pay dividends to attract investors subject to
“prudent man” restrictions
 Important or Very Important
 84.1% Maintaining consistency with historic dividend
policy
 71.9% Stability of future earnings
 9.3% Flotation costs to issue new equity

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Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 80
Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 81
 Stock Dividends

 Pay additional shares of stock instead of cash

 Increases the number of outstanding shares

 Small stock dividend

 Less than 20 to 25%
 If you own 100 shares and the company declared a
10% stock dividend, you would receive an additional
10 shares.

 Large stock dividend – more than 20 to 25%

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 如何計算除權與除權息參考價

 除息開盤參考價 (Figure 17.2)

 除權開盤參考價
 除權息開盤參考價

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 Stock Splits

 Stock splits – essentially the same as a stock dividend

except expressed as a ratio
 For example, a 2 for 1 stock split is the same as a 100% stock
dividend.
 Stock price is reduced when the stock splits.
 Common explanation for split is to return price to a “more
desirable trading range.”
 Reverse stock splits (反分割，類似臺灣現金減資)
 有間美國公司從不分割股票，請問目前股價為美金多
少？(Zuvio)
1) 0−100、2) 100−1,000、3) 1,000−10,000、
4) 10,000−100,000、5) 100,000+

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Berkshire Hathaway A股 (1980-2000)

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Berkshire Hathaway A股 (2000-2021)

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Accounting procedure of stock
dividend/split
 The accounting treatment is not the same
between stock dividend and split and it depends
on
– Whether the distribution is a stock split or a stock
dividend
– The size of stock dividend is it is called a dividend

Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 87

 Peterson has 10,000 shares of stock outstanding, each
selling at $66.
 The market value is 66×10,000=660,000
 The balance sheet of Peterson

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Example of a Small Stock Dividend

 With a 10% stock dividend (shares increases from

10,000 to 11,000)

 資本公積增加65,000
 公司總價值不變，保留盈餘減少66,000

Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 89

 Example of a Stock Split

 A two-for-one stock split (shares increases from

10,000 to 20,000)

 面額從$1變成$0.5，流通在外股數倍增
 公司總價值不變

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Other payment type−Cash reduction
(現金減資)
 在臺灣越來越流行
 將股本反還給股東
 京華酒店、國巨是成功案例
 與Repurchase不同之處
– Repurchase用市價買回，現金減資用帳面價值買回
– 減資是反還股本，不用繳稅， Repurchase有資本利
得稅(雖然台灣不用繳)

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Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 92
Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 93
Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 94
鴻海 2018/05/11盤後宣布減資20%，
2018/5/14 股價上漲5元 (4.7%)

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 臺灣現金減資公司家數 (2002-2017)

25

22
20
18
16
15
14 14
N
10 10 10

7
6
5 5
3 3
1 1
0
2002 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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減資的宣告效果

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中華汽車 (2204)

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Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 99
嘉裕(1417)

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Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 101
Copyright © 2020 by The McGraw-Hill Companies, Inc. All rights reserved 17 - 102
10391. The owners' equity accounts for Blueswell Industries are shown here:

If Blueswell Industries declares a 1-for-5 reverse stock split, there will be ____
shares outstanding at a par value of _____ per share.

93. Glendale Paving currently has 120,000 shares of stock outstanding that sell for $54 per
share. Assume no market imperfections or tax effects exist. What will the new share price
be if the firm declares a 40 percent stock dividend?

95. The balance sheet for Apple Pie Corp. is shown here in market value terms. There are 5,000
shares of stock outstanding.

The company has announced that it is going to repurchase $4,350 worth of stock. What will
the price of the stock be after this repurchase?

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10491. The owners' equity accounts for Blueswell Industries are shown here:

If Blueswell Industries declares a 1-for-5 reverse stock split, there will be ____
shares outstanding at a par value of _____ per share.
New shares = 9,000 × 1/5 = 1,800 shares New par value = $1 × 5/1 = $5

93. Glendale Paving currently has 120,000 shares of stock outstanding that sell for $54 per
share. Assume no market imperfections or tax effects exist. What will the new share price
be if the firm declares a 40 percent stock dividend?
New price = $54 (1/1.40) = $38.57

95. The balance sheet for Apple Pie Corp. is shown here in market value terms. There are 5,000
shares of stock outstanding.

The company has announced that it is going to repurchase $4,350 worth of stock. What will
the price of the stock be after this repurchase?
Current price per share = $175,000/5,000 = $35
Number of shares repurchased = $4,350/$35 = 124.29
New shares outstanding = 5,000 - 124.29 = 4,875.71
New share price = ($175,000 - $4,350)/4,875.71 = $35
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105
97. You own 1,000 shares of stock in Avondale Corporation. You will receive an 80-cent per
share dividend in one year. In two years, Avondale will pay a liquidating dividend of $40
per share. The required return on Avondale stock is 14 percent. What will your dividend
income be this year if you use homemade dividends to create two equal annual dividend
payments?

99. Built Rite Corp. is evaluating an extra dividend versus a share repurchase. In either case,
$5,500 would be spent. Current earnings are $0.80 per share, and the stock currently sells
for $33 per share. There are 250 shares outstanding. Ignore taxes and other imperfections.
You own one share of stock in this company. If the company issues the dividend, your total
investment will be worth ____ as compared to ____ if the company opts for a share
repurchase.

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106
97. You own 1,000 shares of stock in Avondale Corporation. You will receive an 80-cent per
share dividend in one year. In two years, Avondale will pay a liquidating dividend of $40
per share. The required return on Avondale stock is 14 percent. What will your dividend
income be this year if you use homemade dividends to create two equal annual dividend
payments?
↑ = $31.48 $31.48 = (D/1.14) + (D/1.142);
2

P0 = ($0.80/1.14) + ($40/1.142) I D = $19.117

Dividend income = 1,000 × $19.117 = $19,117

99. Built Rite Corp. is evaluating an extra dividend versus a share repurchase. In either case,
$5,500 would be spent. Current earnings are $0.80 per share, and the stock currently sells
for $33 per share. There are 250 shares outstanding. Ignore taxes and other imperfections.
You own one share of stock in this company. If the company issues the dividend, your total
investment will be worth ____ as compared to ____ if the company opts for a share
repurchase.
Dividend per share = $5,500/250 = $22
Ex-dividend stock price = $33 - $22 = $11
Shareholder value with dividend option = $22 + $11 = $33
Shares repurchased = $5,500/$33 = 166.6667
Shareholder value with repurchase = $33
Shareholder value if shares held = $33

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