This chapter corresponds to:
Chapter 11 of "Financial Cost Management" by the Chinese Institute of Certified Public Accountants, Chapter 11 of "Corporate Finance" by Ross. Partially refer to the courseware of Dongao accounting teacher Yan Huahong.
1. Form and process of dividend distribution
(1) Different types of dividends
| cash dividend |
It has nothing to do with how much cash the company has. |
| stock dividends |
A company issues additional shares of its own stock to shareholders. Bonus shares will not change the capital structure or shareholding ratio, but will dilute EPS and PPS. |
| property dividends |
Stocks held in other companies |
| debt dividend |
Notes payable or corporate bonds |
(2) Four important dates
Chinese rules:
| Dividend declaration date |
declaraiton date |
| Equity registration date |
record date |
| ex-dividend date |
ex-dividend date |
| Dividend payment date |
payment date |
//Ross's book corresponds to the American rules, ex-rights first and then registration
(3) Ex-rights reference price
1. Ex-rights reference price = (price on registration date - dividend payment)/(1 + bonus share rate + conversion rate)
//Proof: The shareholder wealth remains unchanged, and the theoretical price is derived.
Actual prices can be used to analyze: changes in shareholder wealth after profit distribution.
2. Extension of Gordon Growth Model
Stock price on the registration date V0=D0+D1/(Rs-g)
Stock price on ex-rights day V0=D1/(Rs-g)
The single-period formula of the dividend discount model can be derived combined with the cash flow model.
2. Dividend theory and policy
(1) Two types of dividend theories
The impact of dividends on prices, and investor preferences
The mapping process of dividends/retention → stock price depends on taxes, signals (CAPM beta) and agency costs. There are both systemic risks and unsystematic risks.
| Classification |
Conclusion (Company Value and Investor Preference) |
premise |
Note |
|
| Dividend irrelevance theory (no tax) |
Dividend MM theorem |
Company value has nothing to do with dividend policy, and there is no optimal dividend payout ratio; investors have no preference between dividends and capital gains |
Perfect capital market, no tax |
Ross generally supports the irrelevance theory. In the following categories, he only recognizes the impact of taxes and issuance fees. |
| dividend correlation theory (with tax) |
tax gap theory |
Regardless of transaction costs: a low dividend policy should be implemented Consider transaction costs: If capital gains tax + transaction fee > dividend income tax, a high dividend policy should be implemented |
Dividend income tax is higher than capital gains tax |
Pay attention to the formulas for the 38 questions at the end of the class. Tsinghua real questions. |
| customer effect theory |
Low tax rate shareholders: high dividend policy High tax rate shareholders: low dividend policy |
|||
| bird in hand theory |
All shareholders want a high dividend policy |
Investors’ risk aversion coefficient is positive |
Ross hated the theory and scolded it for several pages. The problem is, it's assumed that high dividends actually reduce risk. In fact, it is possible that executives are cashing out. |
|
| signaling theory |
Investors’ subjective evaluation. High dividend: A good signal is stable performance, a bad signal is no growth opportunities, PVGO<=0 Low dividend: A good signal is that there are many growth opportunities, a bad signal is that the operation is unstable |
Signal→Beta→Rs→V0 |
Ross generally supports the idea that high dividends = good signals, but since he believes in the irrelevance theory, this doesn't matter. |
|
| agency theory |
Depends on the following relationships: Creditors – Shareholders. Creditors demand low dividends and guarantee repayment of debts. Shareholders - Managers. Shareholders demand high dividends to constrain managers' on-the-job consumption. Controlling shareholder - minority shareholder. Major shareholders demand low dividends for control. |
Replenish
Ross' summary of dividend policy
Pros and Cons of Paying Dividends
Reasonable dividend policy
(2) Four types of dividend payment functions
| residual dividend policy |
Fixed (Growth) Dividend |
Fixed dividend payout rateb |
Low normal + extra dividend |
|
| definition |
Back-squeezing method: Long-term capital requirements * target equity ratio = retained profits Net profit - retained profit = dividend distribution Usually retained profits are ≥ statutory surplus reserve |
D is fixed, or D grows fixedly by g. This is the assumption of the investment DDM model. |
b or 1-b fixed. It's equivalent to a debt, you have to give even if you don't want to. |
comprehensive |
| Theoretical basis |
irrelevance theory |
Related theories (signal theory, bird-in-hand theory) |
On |
On |
| Maintain optimal capital structure (Min WACC and Financial Risk) |
favorable |
unfavorable |
unfavorable |
unfavorable |
| Combined with actual profit |
Unfavorable (completely oriented towards future projects, regardless of current profitability) |
Disadvantage (turns into capital cost) |
favorable |
Low normal part is disadvantageous, extra part is advantageous |
| Build a good image (reduce Rs thereby increasing share price) |
Di is unstable and has a negative image |
DiDesign, advantageous image |
Di is unstable and has a negative image |
Guaranteed dividends are good for good image, but additional dividends are bad |
(3) Factors affecting dividend policy
//CPA framework: legal, shareholders, company
//Roth Framework: Comparing Dividends and Repurchases
Flexibility (cannot cut dividends), management incentives (higher EPS), hedge against dilution (treasury stocks), undervaluation (good sign)
3. Stock splits and buybacks
//Stock split = stock dividend, stock price will ↓
//Stock buyback = cash dividend, stock price will be ↑. Academically, the two are perfect substitutes.
(1) Summary of five types of transactions
| motivation |
lower stock price |
increase stock price |
See Dividend Theory |
||
| Transaction Type |
stock dividends (Bonus shares and transfer of shares) stock dividend |
stock split (denomination exchange) stock split |
stock reverse split reverse repurchase |
stock buyback stock repurchase |
cash dividend regular cash dividend |
| Number of shares |
↑ |
↑ |
↓ |
↓ |
= |
| EPS |
↓ |
↓ |
↑ |
↑ |
？ |
| PPS |
↓ |
↓ |
↑ |
↑ |
？ |
| Capital Structure |
= |
= |
= Adjustments to internal accounts of shareholders’ equity only |
Liabilities (Leverage)↑ |
Only the residual dividend policy remains unchanged |
| Controlling interest (shareholding ratio) |
= |
= |
= |
Change |
= |
//Signal theory:
Issuing new shares = releases a signal that the company’s stock price is overvalued, resulting in price ↓
Stock buyback = releases a signal that the company’s stock price is undervalued, resulting in price ↑
//Be sure to study it in conjunction with Ross Chapter 19. The Chinese version of the after-school questions includes Tsinghua’s real questions.
(2) Supplement: Accounting treatment of stock dividends and stock splits
//The following is for the owner's equity subject, which is the test content of several financial report questions after question 21 of the Chinese version of the after-school version.
1. Stock split and reverse split: no change
Leave the account unchanged, only change the number of shares and par value per share.
2. Small stock dividends: 10%-25%, taking into account market value
Less: Retained earnings = number of new shares * market price
Add: common stock capital = number of new shares * par value
Add: capital reserve = number of new shares * (market price - face value)
3. Large stock dividends: bonus shares for more than 25%, only book value will be considered
Less: Retained earnings = number of new shares * face value
Add: common stock capital = number of new shares * par value
4. Ross: Dividend irrelevance theory Supplementary content
(1) Economic proof of the irrelevance theory of dividends: self-made dividends
Individuals can buy and sell stocks at any time from 0 to 1. The cash inflow and outflow correspond to the stock price and number of shares, depending on the time point.
The company can issue new shares or repurchase shares. If the stock price changes after ex-rights, multiplied by the number of new shares, the total PV obtained will remain unchanged.
//This diagram is from microeconomics, see the chapter about Van Lian straddling consumption constraints. You can use the implicit function to derive the slope to be negative.
//Attached are three angles to refute the irrelevance theory of dividends
1tax
2Issuance fees
3 Transaction fees
(2) Economic proof of buyback = dividend: shareholder wealth
Buyback: The value of the shares in the hands of shareholders remains unchanged
Dividends: Period 1, shareholders have dividends + stock market value
(3) Buyback vs. dividend: dividend tax, profits tax and ex-rights price
//After-class exercises and Tsinghua 2021 real questions
1.Do not consider any taxes
This is the ex-rights reference price formula of CPA. If bonus shares and capitalization are not considered,
Price on ex-dividend day = price before ex-dividend - dividend
2. Only dividend tax is considered, not profit tax.
Ex-dividend date price = price before ex-dividend - dividend * (1 - dividend tax)
prove:
There are two plans, one is to buy today, collect the dividends, and sell tomorrow. The second is to buy tomorrow and sell tomorrow. The bid-ask spread is not considered.
Method 1, use the time value of money from financial management.
Draw a cash flow diagram.
Option 1, P0=PX+D0*(1-tp), is directly proved.
Method 2: Use the HPR formula from investment science.
Option 1, HPR=(D0*(1-tp)+Px-P0)/P0
Option 2, HPR=(PX-PX)/PX=0
The two solutions are equivalent, so P0-PX=D0*(1-tp)
3. Consider double taxation
(P0-Px)/D=(1-tP)/(1-tG)
deformed
Price after ex-dividend = Price before ex-dividend - Dividend*(1-Dividend tax)/(1-Profit tax)
Its significance in corporate finance is: the difference in taxes causes the stock price to fall after ex-dividends, which is not necessarily equal to the dividend.
prove:
(price before ex-dividend - purchase price) * (1 - profits tax) / purchase price = [dividend * (1 - dividend tax) + (price after ex-dividend - purchase price) * (1 - profits tax)] / purchase bid
deformed
(Price before ex-dividend - Purchase price) * (1 - Profits tax) = Dividend * (1 - Dividend tax) + (Price after ex-dividend - Purchase price) * (1 - Profits tax)
Eliminate the purchase price
Price before ex-dividend*(1-profit tax)=Dividend*(1-dividend tax)+Price after ex-dividend*(1-profit tax)
transfer item
(price before ex-dividend - price after ex-dividend)*(1-profit tax)=dividend*(1-dividend tax)
The formula for question 38 can be obtained:
(Price before ex-dividend - Price after ex-dividend)/Dividend = (1-Dividend tax)/(1-Profit tax)
(4) Buyback vs. Dividend: The impact of personal tax and corporate tax on dividend policy
//Treasury bond income in Example 1, four types of mutually exclusive projects in Question 39 are preferred
Inequalities are easy to formulate. It is best to do the 40 questions after class. After considering the Bush tax reform, the four variables of personal income, personal dividend tax, corporate income tax, and corporate dividend tax are required to formulate inequalities and solve boundary conditions.
(5) Dividend smoothing: Lintner model
实质：基于信号理论，股利是一种承诺，不宜轻易延缓或者降低。考虑经营持续性，即使业绩不错，也不会立即等比例增加分红，而是会对目标增加额做调整。
下期增加股利=D1-D0=s*(t*E1-D0)
E1为下期EPS。如果保持目前股利支付率t，就应该增长到t*E1，或增加t*E1-D0
数学本质就是个点斜式
//点斜式的应用：
CAPM/SML估期望收益·股权资本成本
MPT·CAL估期望收益
无杠杆贝塔与杠杆贝塔
MM定理求杠杆股权资本成本
Lintner模型股利平滑化