AFM373 Lecture Notes - Lecture 13: Cash Flow, Tender Offer, Share Repurchase
28 Jun 2018
School
Department
Course
Professor
Class 18
March 12, 2018
11:41 AM
AFM 373 Page 1
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Discipline for management •
Great for taking profitable
growth opportunities.
○
Financial flexibility
-
downside is that
management has too much cash all the
time. So we debt to keep them in
check.
•
One big aspect with debt policy:
AFM 373 Page 2
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By irrelevant it means it wasn't
going to change shareholder
value with dividend. If I pay out
$1 of cash, it'll also decrease
equity for $1.
○
But dividends are subject to
double taxation.
○
If there's taxes, why would
people pay out dividends.
○
M&M said payout policy is irrelevant to
the other alternatives if there's no
taxes,
•
Alternative is share repurchase. The tax
difference is with share repurchases,
the shareholders are making capital
gain when selling the shares back and
not income. Capital gain is taxed lower
than income generally.
•
Payout policy to shareholders
If there are lots of growth
opportunities, you wouldn't be
giving out cash to shareholders
anyways.
○
However, if you used up all your
positive NPV projects, give the
cash back to shareholders, they
will invest it somewhere better.
○
M&M also said is irrelevant in terms of
positive investment opportunities.
•
Taking on debt to reduce equity ○
Adjust capital structure.
1.
Different taxation
2.
We want to delay capital gains
because of time value of money.
○
Share repurchase, there is a self selection
to paying taxes. If shareholders are
optimistic, they wouldn't be selling the
shares. - this is getting rid of prereferral
shareholders. And those that hand over
back the shares, are those that wouldn't
mind the taxation effects.
Increasing leverage, increased required
returns, hoping to get better EPS. In the
good times, the debt increases EPS because
you are effectively increasing leverage. So
EPS increases but required returns also
increase so the effect on stock price is
ambiguous.
3.
Signals that management thinks its
undervalued
4.
e.g. I'm going to buy back 5% of my
shares at this date. If too many
shareholders tender, I will prorate
you down.
○
Tender offer is one great big declaration•
Tender offer is a stronger signal that the
firm is under value. Because it will
definitely be done and the price to buy
back will be higher than open market
prices.
•
Tender offer vs open market share repurchase
Irregular dividends, and pays at a big
number once in a while. Not consistent.
•
In Deluxe we did share buyback to reduce
equity, we could've equally done the
special dividends that just paid out cash to
shareholders. The difference would've
been, the number of shares would've
decreased with the buyback and provides
exist for the shareholder.
With special
•
Special dividends
AFM 373 Page 3
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Document Summary
Financial flexibility - downside is that management has too much cash all the time. So we debt to keep them in check. M&m said payout policy is irrelevant to the other alternatives if there"s no taxes, By irrelevant it means it wasn"t going to change shareholder value with dividend. of cash, it"ll also decrease equity for . If there"s taxes, why would people pay out dividends. The tax difference is with share repurchases, the shareholders are making capital gain when selling the shares back and not income. Capital gain is taxed lower than income generally. M&m also said is irrelevant in terms of positive investment opportunities. If there are lots of growth opportunities, you wouldn"t be giving out cash to shareholders anyways. However, if you used up all your positive npv projects, give the cash back to shareholders, they will invest it somewhere better. Share repurchase, there is a self selection to paying taxes.
