Advanced Corporate Finance
Getting Started !
UESTC-Webster University FINC 5880
Chengdu-P.R.C,Spring 2005
Agenda
? Introduction
? Your team
? Your S&P 500 company
? Your feed back
? Fresh Up on FINC 5000
? Introduction Dividend
Policy (ch,15)
? Your homework…
? In the news…
Rank Company Job Growth*
Company
Size* U.S,Employees
1 Wegmans Food
Markets
Moderate Large 30,128
2 W.L,Gore Moderate Midsized 4,270
3 Republic
Bancorp
Negative Small 1,292
4 Genentech High Midsized 6,756
5 Xilinx Moderate Small 2,059
6 J.M,Smucker High Midsized 3,337
7 S.C,Johnson &
Son
Moderate Midsized 3,420
8 Griffin Hospital Moderate Small 1,029
9 Alston & Bird Moderate Small 1,476
10 Vision Service
Plan
Negative Small 1,976
11 Starbucks High Large 72,185
12 Quicken Loans High Small 1,911
13 Adobe Systems Moderate Small 2,425
For the Pro’s
? Use Yahoo Finance…
? Use Bloomberg
? Use SEC (EDGAR)
? Look at the business news
(Economist,Fortune etc.)
? Follow the financial markets
? Follow the news on your
team’s company
? Update your financials
whenever new financials are
released
? Use the latest latest latest
financials!
Most admired companies…
? Rank,1*
Wal-Mart Eight Key
Attributes of
Reputation**Score past
5 years
? Innovation
? Employee talent
? Use of corporate assets
? Social responsibility
? Quality of management
? Financial soundness
? Long-term investment value
? Quality of products/services
Your feedback…
? Remember;
? Products and Markets
? Financial Performance
(profitability FY 2000-
2004)
? Value creation (Share
price FY 2000-2004)
? FCF and WACC% (apply
your knowledge)
? Latest news on your
company…
Using the phenomenal success of the
iPod,Steve Jobs is having another go at
the mass market for computers
How we will run the classes…(as a
business)
? Be in time (even when it snows…) we
will begin 8.30 AM sharp (synchronize
your watches please)
? Do not bring your entire breakfast to
the class room please…
? Switch of your mobiles; exceptions can
be made for emergencies but you will
have to tell me in advance…
? Make sure that if you bring your laptop
that the battery is fully charged…(use
flash memory)
? Make sure your flash memory is
compatible with the PC you will use to
show your PPT’s
? We will have one break during the
morning before lunch and one break
after lunch in the afternoon for the
afternoon class … (10.05-10.25 am and
14.35-15.05 pm)…you can ask
individual/team questions in that
period…
Exams and Portfolio’s
? You will work in teams
? You will work on a S&P 500
company of your team’s
choice
? You will have to hand in Mid
Term portfolio and Final
Portfolio of ALL
assignments…
? You will have No mid term
exam only a final exam
? All other information you can
find in the syllabus…
? Any Questions?
Feel overloaded?
What is (advanced) corporate
finance?
? Corporate Finance:,Any
decision involving the
use of money by a
business …(everything a
business does)”
? Advanced=Applied=
getting your hands
dirty…(work,work,
work…)
? FUN! (I know it sounds
sick…but it is true once
you get on top of it…)
What is it about?
? 1)Investment decisions of
companies
? ROC versus a hurdle rate
(WACC%)
? 2)Financing decisions of
companies
? Lowest WACC% and target capital
structure…
? 3)In case the company has
enough cash but not enough good
ideas…how and what of cash to
return to shareholders…
? Essentially all of these decisions
have to do with valuation…the
value you can put on a business…
Fresh Up your knowledge
? You did FINC5000
? You learned Financial Ratio’s
? You learned Time Value of
Money
? Risk and Return
? Valuation-WACC% and FCF
? Capital Budgeting (NPV-
IRR% and PBP)
Finance is about Value!
Value of what?
Equity…(owner’s capital)
The Firm including LT debt
Class Assignment;
What is the Firm value and Equity value?
Equity Value is the same…
Valuation in steps
The simplified model
Equity valuation model
Equity valuation using FCF’s
Firm Valuation,Basic Model
Estimating WACC%
Rf (10 year T-bond yield)
Rf differs per country and in time
Here are some historical Rf’s
Risk premium of the market
(market spread)
Implied premiums
Calculation example…
Market spread (Rm-Rf) over time…
Taxes on capital gains and dividends
What spread to use?
Getting the beta right…
What business are you in?
Operational leverage
Financial leverage (Hamada)
Cost of debt in the WACC%
Rating your company…
Rating Table…
WACC% completion…
WACC%
FCF?
Equity or Firm approach?
Operating Cash Flow
Cash flow from investments
Be careful…
WC investments…
Dividend policy
Potential dividends…
Calculating FCF (estimated)
Growth%?
Growth in EPS
The professionals…
How good?
Note…
ROE usage…
Note below!
Note,ROC%=E/(E+D)*ROE%+D/(E+D)*(1-t)*ROD% (ROD%=i)
Other growth estimations
Other growth estimates
Now value…
Tsingtao illustrated
Tsingtao illustrated
Tsingtao illustarted
Tsingtao… illustrated valuation
Terminal value…
So now you can do it…
Value…
What to do with the income earned?
(ch,15)
? How much do we
distribute to
shareholders?
? Cash dividend or
Buy backs?
? Stable pattern of
payments over
time?
The big picture of finance….
Dividends or capital gains?
? Maximize shareholders value
? What do shareholders prefer?
? Cash dividend now or..
? Plough back of money earned to generate
future earnings?
? Remember,Po=D1/(Ks-g)
? Increasing D1 would lower g(rowth)
? Thus the outcome Po should be the
same
? The point is now to find the balance
between a sustainable D and g-level…
Do it now assignment…
? Apply the former
formula to a company
that you know;
? Take D1 as current
dividend level fill in Po
(today’s share price)
what is g?
? Now alter the
companies D1
(dividend policy) lower
or higher it
? Fill in Po again
? What is g now after
you made this change?
,Bird in the hand theory‖
? Gordon-Lintner
theory
? The required rate
of return Ks will
decreases if the
dividend payout
is increased
? The future capital
gains are less
certain then
received dividend
payments now
FORTUNE (november 2004)
? CASH PAYOUTS
Cashing In On Dividend Stocks
Long derided as dowdy,shares with
payouts are outperforming those without,
Maybe the widows and orphans were right,
after all.
?
Okay—so it ain't Google,But what's one of
the best ways to outperform the market?
The answer,dividend stocks,
?, Dividend supremacy may
be here to stay,For starters,
corporations are sitting on
mountains of cash,After
slashing expenses and
improving profits in recent
years,S&P 500 companies
are reporting a 19% uptick
in earnings this year,and
cash flow has soared,―
,Dividend irrelevance theory‖
? Miller and
Modigliani-theory
? The value of the
firm only depends
on its basic
earnings power
and business risk
? Shareholders can
construct their
own dividend
policy by selling
shares for cash
,Tax Preference Theory‖
? There are some reasons from a
tax point of view why
shareholders do not like too
much dividend now:
? Dividends are taxed at up to 39,6%
and capital gains at maximum 20%
? Taxes on capital gains are only paid
when the shares are sold
? If the shares are hold until you die
no tax is due at all!
So if Payout is increased from 0%
to 100%
? Lintner/Gordon (bird in
hand) say the share price
will increase!
? Modigliani/Miller
(irrelevance) say the share
price will not change
? Tax preference model says
the share price will
decrease!
? What is true/What does
practice tell us? The Experiment
Empirical evidence shows:
? For a valid statistical test we need to be
able to use the CP assumption
? In practice CP conditions do not hold
? The cost of equity remains difficult to
assess..
? Shareholder’s preferences differ highly
for the same shareholdings
Assignment,Dividend Yield
? Go on the internet and find the
dividend yield of the S&P 500
? Draw your findings and show it to
the class
? When was it high; when was it
low?
? Is there a relation with economic
growth of the US in these periods?
? Are there any other events that
cause the pattern that you found
you think?
? What are these and why?
Shareholders like dividend policy
consistency
? Dividend policy changes trigger
hefty reactions on a share’s
price
? Dividend policy that shows
constant growth in line with
sales and earnings is always
preferred…
? Shareholders do not like
surprises but predictable
dividend levels
Dividends …
? Are sticky…,They do not change
much over time…
? Depend on earnings long term…
How to set the dividend target?
? Keep in mind,Companies need
to maximize shareholders
value
? Retaining earnings instead of
paying out in dividends is only
wise if management thinks
that the retained earnings will
have better returns then when
if the dollars are paid out as
dividend…
? Some companies have a lot of
cash and not enough profitable
plans to spend it on…
The Residual Dividend Model
? Set the capital budget (say M
USD 60)
? Plan net earnings (say M USD 60)
? Use the target D/E ratio (say
40/60)
? Calculate retained earnings (60%
of 60 M USD is 36 M USD)
? Calculate what is left (residual)
for paying out dividends…(60 M
USD – 36 M USD= 24 M USD)
? Disadvantage,the paid out dividends can
be very volatile over years.,
? In practice therefore companies take a
LT view and calculate averages over 5-
10 years to base their target levels on…
Assignment,Earnings,FCF and
Dividends
? EPS can be volatile over years
? And therefore FC/PS can be volatile
? But DPS (dividend per share) normally follows a
stable pattern…
? Take your company’s EPS,and Cash Flow/share over
the past say 10 years
? Also determine the DPS
? Calculate DPS % EPS
? Calculate DPS % Cash Flow/share
? Which one is more stable?
? Draw your findings/be able to present…
Dividend dates
? Declaration date,announcement of
payout of dividend and date of
payment
? Holder-of-record-date,point in time
date and exact time,that it is checked
who is the holder of the shares and is
entitled to the dividend
? Ex-dividend-date,the date when the
right to the dividend no longer goes
with that share; on this date normally
the share price falls with the amount
of the dividend…paid out
? Payment date; date that the company
sends out the checks to the holders of
record
Dividend Reinvestment Plans
(DRIP’s)
? Shareholders can reinvest
their cash dividends in
shares of the company
? The company is to decide to
issue new stock or old stock
? A bank acts as trustee to
handle this and see to it
that all shareholders
interested in DRIP get their
pro rata portion of shares
? The advantage that these
shares can be offered at a
3-5% discount
? The disadvantage is that
shareholders have to still
pay income tax over the
―cash dividends‖
Stock splits
? Help to find the optimal value
and EPS for a company (share
price $ 20-80 range)
? Help small investors to
acquire shares in the company
? In general increases trade in
the share boosting value
? Normally at announcement
creates equity value/share
price increases
Stock repurchases
? Enhance shareholder’s value
? Are becoming more popular
? The company has too much equity
outstanding
? Acquiring shares to distribute shares to
employees with options excercised
? Stocks repurchased are also called Treasury
Stock
? Capital gains are substituted for dividends
? Since nr,Shares outstanding decrease all
ratios improve like EPS,cash flow/share,thus
increasing value per share…
Share repurchases
? Signal that management think
the share is undervalued
? Often is better then increasing
dividends because this raises
expectations in the longer run
whereas a repurchase could be
the result of a ST cash excess
? If the repurchase follows a LT
policy the dividend expectation
can be reduced by increasing
the dividend with small portions
? Repurchases can adjust the D/E
towards target levels in a fast
way…
Assignment,Share Buy backs
? Go on the internet and find some companies that
did a share buy back
? Indicate the size of the buy back
? The date of the buy back
? How the share price reacted to the buy back after
the announcement
? If the company’s share price has benefited up to
now from that buy back program.
? Be able to present your findings…
Assignments,Who pays dividends?
? Go on the internet
? Select about 10 companies from
the S&P that pay dividends
? Pick these companies from
different sectors (industries,TMT,
etc)
? Calculate their dividend yield
? Rank these companies by dividend
yield; high yield first
? Can you draw conclusions on the
relation industry type and level of
dividends paid out?
Announces dividend
pay out…
Dividends paid out
? Have been
reduced over
the years in
general
? This is
consistent with
lower interest
rates… (why?)
? And consistent
with lower Cost
of Equity
Earnings and dividend % (1960-2003)
S & P 5 0 0
0, 0 0 %
2, 0 0 %
4, 0 0 %
6, 0 0 %
8, 0 0 %
1 0, 0 0 %
1 2, 0 0 %
1 4, 0 0 %
1 6, 0 0 %
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43
y e a r ( y r 1 = 1 9 6 0 )
%
E a r n i n g s Y i e l d
D i v i d e n d Y i e l d
Understanding your company…
? Takes a lot of reading
? Comparing
? Research and
? Analysis
? But it is fun!
? Make sure you take a company/product you
like very much or are curious to know more
about…,
Global Understanding
KEY assignment 1,Business Analysis
? In order to be able to make a correct valuation of your company you will
have to start to make a Business Analysis
? You need to apply your knowledge of FINC5000 and MRKT5000
? The Business Analysis includes:
? External Analysis
? Economic Environment of the company
? Customer analysis
? Competitor assessment
? Government/Regulatory assessment
? Internal Analysis
? The Vision and Mission of the company
? Products and services
? Product life cycles
? Pricing and differentiation
? Marketing and selling strategies
? Supply chain
? Human resources
? Investment priorities
? Fianance and Accounting
Key Assignment 1 (continued)
? The financial analysis includes
? A full list of up to date financial ratios of your
company ( that is including Q3 2004)
? A financial ratio comparison with its main
competitors
? The position in its industry analysis includes
? A 5 forces analysis (Porter)
? BCG Matrix analysis
? SWOT analysis
Big trouble for Merck
Where to get information…
? Website of your company (search for
investor relations)
? Download the financial statements of
your company over the past 5 year but
preferably longer
? Balance sheets
? Income statements
? Cash flow statements
? Use Yahoo Finance,
http://finance.yahoo.com/
? You need help?; Financial Statement
Analysis a valuation approach,Leonard
Soffer,Prentice Hall,isbn;7-302-08257-X
(China publication 46 RMB)
? Gather the latest information on your
company also in the press and keep track
of it…
In the news…
? Apple’s Q4
results…
? Airbus and
Boeing
? Samsung
stronger
? The big 3
(GM Ford
and
Chrysler) in
the car
industry
? Hard to
beat
And…
? Ideal for desperate housewives,
television on your cell phone….
The case for
keeping a close eye
on leading
economic indicators
RATIONAL CONSUMER
Televisions go flat
Before you continue with business law…Directors and
officers insurance
The price of prominence
Jan 13th 2005
? WHEN a company and its directors are sued for
mismanagement or worse,who pays for the
settlement? Usually,an insurance company,
? During the first six months of last year,claims worth
more than $1 billion were paid by (or came due from)
insurers who write directors and officers (D&O)
coverage,according to Willis,an insurance broker,
? Although directors are used to being sued,they are
not in the habit of opening their own wallets in order
to pay,Last week's settlements of investors' class-
action suits against former directors of Enron and
WorldCom are therefore unusual.
Getting Started !
UESTC-Webster University FINC 5880
Chengdu-P.R.C,Spring 2005
Agenda
? Introduction
? Your team
? Your S&P 500 company
? Your feed back
? Fresh Up on FINC 5000
? Introduction Dividend
Policy (ch,15)
? Your homework…
? In the news…
Rank Company Job Growth*
Company
Size* U.S,Employees
1 Wegmans Food
Markets
Moderate Large 30,128
2 W.L,Gore Moderate Midsized 4,270
3 Republic
Bancorp
Negative Small 1,292
4 Genentech High Midsized 6,756
5 Xilinx Moderate Small 2,059
6 J.M,Smucker High Midsized 3,337
7 S.C,Johnson &
Son
Moderate Midsized 3,420
8 Griffin Hospital Moderate Small 1,029
9 Alston & Bird Moderate Small 1,476
10 Vision Service
Plan
Negative Small 1,976
11 Starbucks High Large 72,185
12 Quicken Loans High Small 1,911
13 Adobe Systems Moderate Small 2,425
For the Pro’s
? Use Yahoo Finance…
? Use Bloomberg
? Use SEC (EDGAR)
? Look at the business news
(Economist,Fortune etc.)
? Follow the financial markets
? Follow the news on your
team’s company
? Update your financials
whenever new financials are
released
? Use the latest latest latest
financials!
Most admired companies…
? Rank,1*
Wal-Mart Eight Key
Attributes of
Reputation**Score past
5 years
? Innovation
? Employee talent
? Use of corporate assets
? Social responsibility
? Quality of management
? Financial soundness
? Long-term investment value
? Quality of products/services
Your feedback…
? Remember;
? Products and Markets
? Financial Performance
(profitability FY 2000-
2004)
? Value creation (Share
price FY 2000-2004)
? FCF and WACC% (apply
your knowledge)
? Latest news on your
company…
Using the phenomenal success of the
iPod,Steve Jobs is having another go at
the mass market for computers
How we will run the classes…(as a
business)
? Be in time (even when it snows…) we
will begin 8.30 AM sharp (synchronize
your watches please)
? Do not bring your entire breakfast to
the class room please…
? Switch of your mobiles; exceptions can
be made for emergencies but you will
have to tell me in advance…
? Make sure that if you bring your laptop
that the battery is fully charged…(use
flash memory)
? Make sure your flash memory is
compatible with the PC you will use to
show your PPT’s
? We will have one break during the
morning before lunch and one break
after lunch in the afternoon for the
afternoon class … (10.05-10.25 am and
14.35-15.05 pm)…you can ask
individual/team questions in that
period…
Exams and Portfolio’s
? You will work in teams
? You will work on a S&P 500
company of your team’s
choice
? You will have to hand in Mid
Term portfolio and Final
Portfolio of ALL
assignments…
? You will have No mid term
exam only a final exam
? All other information you can
find in the syllabus…
? Any Questions?
Feel overloaded?
What is (advanced) corporate
finance?
? Corporate Finance:,Any
decision involving the
use of money by a
business …(everything a
business does)”
? Advanced=Applied=
getting your hands
dirty…(work,work,
work…)
? FUN! (I know it sounds
sick…but it is true once
you get on top of it…)
What is it about?
? 1)Investment decisions of
companies
? ROC versus a hurdle rate
(WACC%)
? 2)Financing decisions of
companies
? Lowest WACC% and target capital
structure…
? 3)In case the company has
enough cash but not enough good
ideas…how and what of cash to
return to shareholders…
? Essentially all of these decisions
have to do with valuation…the
value you can put on a business…
Fresh Up your knowledge
? You did FINC5000
? You learned Financial Ratio’s
? You learned Time Value of
Money
? Risk and Return
? Valuation-WACC% and FCF
? Capital Budgeting (NPV-
IRR% and PBP)
Finance is about Value!
Value of what?
Equity…(owner’s capital)
The Firm including LT debt
Class Assignment;
What is the Firm value and Equity value?
Equity Value is the same…
Valuation in steps
The simplified model
Equity valuation model
Equity valuation using FCF’s
Firm Valuation,Basic Model
Estimating WACC%
Rf (10 year T-bond yield)
Rf differs per country and in time
Here are some historical Rf’s
Risk premium of the market
(market spread)
Implied premiums
Calculation example…
Market spread (Rm-Rf) over time…
Taxes on capital gains and dividends
What spread to use?
Getting the beta right…
What business are you in?
Operational leverage
Financial leverage (Hamada)
Cost of debt in the WACC%
Rating your company…
Rating Table…
WACC% completion…
WACC%
FCF?
Equity or Firm approach?
Operating Cash Flow
Cash flow from investments
Be careful…
WC investments…
Dividend policy
Potential dividends…
Calculating FCF (estimated)
Growth%?
Growth in EPS
The professionals…
How good?
Note…
ROE usage…
Note below!
Note,ROC%=E/(E+D)*ROE%+D/(E+D)*(1-t)*ROD% (ROD%=i)
Other growth estimations
Other growth estimates
Now value…
Tsingtao illustrated
Tsingtao illustrated
Tsingtao illustarted
Tsingtao… illustrated valuation
Terminal value…
So now you can do it…
Value…
What to do with the income earned?
(ch,15)
? How much do we
distribute to
shareholders?
? Cash dividend or
Buy backs?
? Stable pattern of
payments over
time?
The big picture of finance….
Dividends or capital gains?
? Maximize shareholders value
? What do shareholders prefer?
? Cash dividend now or..
? Plough back of money earned to generate
future earnings?
? Remember,Po=D1/(Ks-g)
? Increasing D1 would lower g(rowth)
? Thus the outcome Po should be the
same
? The point is now to find the balance
between a sustainable D and g-level…
Do it now assignment…
? Apply the former
formula to a company
that you know;
? Take D1 as current
dividend level fill in Po
(today’s share price)
what is g?
? Now alter the
companies D1
(dividend policy) lower
or higher it
? Fill in Po again
? What is g now after
you made this change?
,Bird in the hand theory‖
? Gordon-Lintner
theory
? The required rate
of return Ks will
decreases if the
dividend payout
is increased
? The future capital
gains are less
certain then
received dividend
payments now
FORTUNE (november 2004)
? CASH PAYOUTS
Cashing In On Dividend Stocks
Long derided as dowdy,shares with
payouts are outperforming those without,
Maybe the widows and orphans were right,
after all.
?
Okay—so it ain't Google,But what's one of
the best ways to outperform the market?
The answer,dividend stocks,
?, Dividend supremacy may
be here to stay,For starters,
corporations are sitting on
mountains of cash,After
slashing expenses and
improving profits in recent
years,S&P 500 companies
are reporting a 19% uptick
in earnings this year,and
cash flow has soared,―
,Dividend irrelevance theory‖
? Miller and
Modigliani-theory
? The value of the
firm only depends
on its basic
earnings power
and business risk
? Shareholders can
construct their
own dividend
policy by selling
shares for cash
,Tax Preference Theory‖
? There are some reasons from a
tax point of view why
shareholders do not like too
much dividend now:
? Dividends are taxed at up to 39,6%
and capital gains at maximum 20%
? Taxes on capital gains are only paid
when the shares are sold
? If the shares are hold until you die
no tax is due at all!
So if Payout is increased from 0%
to 100%
? Lintner/Gordon (bird in
hand) say the share price
will increase!
? Modigliani/Miller
(irrelevance) say the share
price will not change
? Tax preference model says
the share price will
decrease!
? What is true/What does
practice tell us? The Experiment
Empirical evidence shows:
? For a valid statistical test we need to be
able to use the CP assumption
? In practice CP conditions do not hold
? The cost of equity remains difficult to
assess..
? Shareholder’s preferences differ highly
for the same shareholdings
Assignment,Dividend Yield
? Go on the internet and find the
dividend yield of the S&P 500
? Draw your findings and show it to
the class
? When was it high; when was it
low?
? Is there a relation with economic
growth of the US in these periods?
? Are there any other events that
cause the pattern that you found
you think?
? What are these and why?
Shareholders like dividend policy
consistency
? Dividend policy changes trigger
hefty reactions on a share’s
price
? Dividend policy that shows
constant growth in line with
sales and earnings is always
preferred…
? Shareholders do not like
surprises but predictable
dividend levels
Dividends …
? Are sticky…,They do not change
much over time…
? Depend on earnings long term…
How to set the dividend target?
? Keep in mind,Companies need
to maximize shareholders
value
? Retaining earnings instead of
paying out in dividends is only
wise if management thinks
that the retained earnings will
have better returns then when
if the dollars are paid out as
dividend…
? Some companies have a lot of
cash and not enough profitable
plans to spend it on…
The Residual Dividend Model
? Set the capital budget (say M
USD 60)
? Plan net earnings (say M USD 60)
? Use the target D/E ratio (say
40/60)
? Calculate retained earnings (60%
of 60 M USD is 36 M USD)
? Calculate what is left (residual)
for paying out dividends…(60 M
USD – 36 M USD= 24 M USD)
? Disadvantage,the paid out dividends can
be very volatile over years.,
? In practice therefore companies take a
LT view and calculate averages over 5-
10 years to base their target levels on…
Assignment,Earnings,FCF and
Dividends
? EPS can be volatile over years
? And therefore FC/PS can be volatile
? But DPS (dividend per share) normally follows a
stable pattern…
? Take your company’s EPS,and Cash Flow/share over
the past say 10 years
? Also determine the DPS
? Calculate DPS % EPS
? Calculate DPS % Cash Flow/share
? Which one is more stable?
? Draw your findings/be able to present…
Dividend dates
? Declaration date,announcement of
payout of dividend and date of
payment
? Holder-of-record-date,point in time
date and exact time,that it is checked
who is the holder of the shares and is
entitled to the dividend
? Ex-dividend-date,the date when the
right to the dividend no longer goes
with that share; on this date normally
the share price falls with the amount
of the dividend…paid out
? Payment date; date that the company
sends out the checks to the holders of
record
Dividend Reinvestment Plans
(DRIP’s)
? Shareholders can reinvest
their cash dividends in
shares of the company
? The company is to decide to
issue new stock or old stock
? A bank acts as trustee to
handle this and see to it
that all shareholders
interested in DRIP get their
pro rata portion of shares
? The advantage that these
shares can be offered at a
3-5% discount
? The disadvantage is that
shareholders have to still
pay income tax over the
―cash dividends‖
Stock splits
? Help to find the optimal value
and EPS for a company (share
price $ 20-80 range)
? Help small investors to
acquire shares in the company
? In general increases trade in
the share boosting value
? Normally at announcement
creates equity value/share
price increases
Stock repurchases
? Enhance shareholder’s value
? Are becoming more popular
? The company has too much equity
outstanding
? Acquiring shares to distribute shares to
employees with options excercised
? Stocks repurchased are also called Treasury
Stock
? Capital gains are substituted for dividends
? Since nr,Shares outstanding decrease all
ratios improve like EPS,cash flow/share,thus
increasing value per share…
Share repurchases
? Signal that management think
the share is undervalued
? Often is better then increasing
dividends because this raises
expectations in the longer run
whereas a repurchase could be
the result of a ST cash excess
? If the repurchase follows a LT
policy the dividend expectation
can be reduced by increasing
the dividend with small portions
? Repurchases can adjust the D/E
towards target levels in a fast
way…
Assignment,Share Buy backs
? Go on the internet and find some companies that
did a share buy back
? Indicate the size of the buy back
? The date of the buy back
? How the share price reacted to the buy back after
the announcement
? If the company’s share price has benefited up to
now from that buy back program.
? Be able to present your findings…
Assignments,Who pays dividends?
? Go on the internet
? Select about 10 companies from
the S&P that pay dividends
? Pick these companies from
different sectors (industries,TMT,
etc)
? Calculate their dividend yield
? Rank these companies by dividend
yield; high yield first
? Can you draw conclusions on the
relation industry type and level of
dividends paid out?
Announces dividend
pay out…
Dividends paid out
? Have been
reduced over
the years in
general
? This is
consistent with
lower interest
rates… (why?)
? And consistent
with lower Cost
of Equity
Earnings and dividend % (1960-2003)
S & P 5 0 0
0, 0 0 %
2, 0 0 %
4, 0 0 %
6, 0 0 %
8, 0 0 %
1 0, 0 0 %
1 2, 0 0 %
1 4, 0 0 %
1 6, 0 0 %
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43
y e a r ( y r 1 = 1 9 6 0 )
%
E a r n i n g s Y i e l d
D i v i d e n d Y i e l d
Understanding your company…
? Takes a lot of reading
? Comparing
? Research and
? Analysis
? But it is fun!
? Make sure you take a company/product you
like very much or are curious to know more
about…,
Global Understanding
KEY assignment 1,Business Analysis
? In order to be able to make a correct valuation of your company you will
have to start to make a Business Analysis
? You need to apply your knowledge of FINC5000 and MRKT5000
? The Business Analysis includes:
? External Analysis
? Economic Environment of the company
? Customer analysis
? Competitor assessment
? Government/Regulatory assessment
? Internal Analysis
? The Vision and Mission of the company
? Products and services
? Product life cycles
? Pricing and differentiation
? Marketing and selling strategies
? Supply chain
? Human resources
? Investment priorities
? Fianance and Accounting
Key Assignment 1 (continued)
? The financial analysis includes
? A full list of up to date financial ratios of your
company ( that is including Q3 2004)
? A financial ratio comparison with its main
competitors
? The position in its industry analysis includes
? A 5 forces analysis (Porter)
? BCG Matrix analysis
? SWOT analysis
Big trouble for Merck
Where to get information…
? Website of your company (search for
investor relations)
? Download the financial statements of
your company over the past 5 year but
preferably longer
? Balance sheets
? Income statements
? Cash flow statements
? Use Yahoo Finance,
http://finance.yahoo.com/
? You need help?; Financial Statement
Analysis a valuation approach,Leonard
Soffer,Prentice Hall,isbn;7-302-08257-X
(China publication 46 RMB)
? Gather the latest information on your
company also in the press and keep track
of it…
In the news…
? Apple’s Q4
results…
? Airbus and
Boeing
? Samsung
stronger
? The big 3
(GM Ford
and
Chrysler) in
the car
industry
? Hard to
beat
And…
? Ideal for desperate housewives,
television on your cell phone….
The case for
keeping a close eye
on leading
economic indicators
RATIONAL CONSUMER
Televisions go flat
Before you continue with business law…Directors and
officers insurance
The price of prominence
Jan 13th 2005
? WHEN a company and its directors are sued for
mismanagement or worse,who pays for the
settlement? Usually,an insurance company,
? During the first six months of last year,claims worth
more than $1 billion were paid by (or came due from)
insurers who write directors and officers (D&O)
coverage,according to Willis,an insurance broker,
? Although directors are used to being sued,they are
not in the habit of opening their own wallets in order
to pay,Last week's settlements of investors' class-
action suits against former directors of Enron and
WorldCom are therefore unusual.
