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19.

1 Different Types of Dividends


Terdapat beberapa tipe yang umum dari dividen diantaranya, yakni:
1.

Reguler cash dividend

Pembayaran dividen biasanya dilakukan 2 hingga 4 kali setahun untuk


perusahaan public.

Kadang-kadang perusahaan akan membayar extra cash dividen.

Kasus ekstrem akan terjadi likuidasi dividen (terjadi pengurangan paid in


capital)

2.

Stock Dividen
No cash leaves the firm
Dividen stock akan meningkatkan jumlah dari saham beredar, dengan demikian akan
mengurangi nilai dari setiap saham.

3.

Stock split
Meningkatkan jumlah saham beredar
Dengan adanya hak untuk menentukan persentase saham dari arus kas perusahaan,
harga saham seharusnya turun.

4.

Stock Repurchase
Perusahaan tidak hanya menggunakan kas untuk membayar dividen akan tetapi kas
pula digunakan untuk membeli kembali saham (treasury stock).

19.2 Standard Method of Cash Dividend Payment

Cash Dividend - Pembayaran dari kas oleh perusahaan kepada pemegang saham.

Ex-Dividend Date - Tanggal yang menentukan pemegang saham diberi hak untuk
pembayaran dividen, setiap pemegang saham sebelum tanggal ini diberi hak untuk
mempertahankan dividennya.

Record Date - Setiap orang yang memiliki saham pada tanggal ini akan menerima
dividen.

Dalam dunia dengan tanpa pajak dan biaya transaksi, harga saham diperkirakan turun
oleh jumlah dari dividen:
Sebelum tanggal ex-dividend

Price = $ (P + 1)

Pada atau sesudah tanggal ex dividen Price = $ P


Price Behaviour around the Ex-Dividend Date

19.3 The Benchmark Case: An Illustration of the Irrelevance of Dividend Policy


KEBIJAKAN MASA KINI: MENETAPKAN DIVIDEN MENYAMAI ARUS
KAS
Misalkan;
Dividends (Div.) pada setiap tanggal menyamai arus kas yang tersedia = $10000
Nilai perusahaan dapat dihitung dengan rumus, sebagai berikut:
Dengan asumsi Rs = 10 %
V 0 DIV 0

DIV 1
1 rs

V 0 $10000

$10000
$19090.91
1.1

Jika diasumsikan 1000 saham beredar, maka nilai dari setiap saham adalah:
P 0 $10

$10
$19.09
1.1

Dengan asumsi ex- dividend datenya menyamai tanggal pembayaran. Maka, setelah
pembayaran dividen segera terjadi, harga saham akan turun sebesar $9.09(19.09 10)
Example: York Corporation , an all-equity firm

At date 0, the managers are able to forecast cash flows perfectly.

The firm will receive a cashflow of $10,000 at date 0 and $10,000 at date 1

The firm will dissolve at date 1.

The firm has no additional +ve NPV projects

MELALUI

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Kebijakan Alternatif: Initial dividend > cash flow

Pay dividend $11 per share immediately i.e., $11 X 1000 shares = $11,000 as total dividend.

The extra $1,000 must be raised by issuing new stock.

Maka dividen untuk pemegang saham lama, yakni:


Note: at date 1 cash flow, the new shareholders will get $1,100 of the total cashflow leaving only
$8,900 to old shareholders.

18.4 Taxes, Issuance Costs, and Dividends


18.5 Repurchase of Stock
18.6 Expected Return, Dividends, and Personal Taxes
18.7 Real-World Factors Favoring a High-Dividend Policy
18.8 A Resolution of Real-World Factors?
18.9 What We Know and Do Not Know About Dividend Policy
18.10 Summary and Conclusions
Appendix A: Stock Dividends and Stock Splits
Different Types of Dividends [PowerPoint slide 18-2]
Students always get a laugh from the dividend in kind. Barter humor.

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Standard Method of Cash Dividend Payment [PowerPoint slide 18-4]


Getting out the calendar clears up the cum and ex date questions.
The Benchmark Case: An Illustration of the Irrelevance of Dividend Policy [PowerPoint
slide 18-6 through 18-9]
The assumptions of the Modigliani-Miller Dividend Model are similar to those we saw in
their capital structure model. An additional assumption is that investment policy of the firm is
set ahead of time, and not affected by changes in dividend policy. We use the following
example to demonstrate that in the MM world, dividend policy is irrelevant, i.e., changes in
dividend policy do not affect the value of the firm.
Dividend Irrelevance in the MM World
To focus on issues concerning dividend policy, our illustration assumes an all-equity firm.
Basic accounting principles tell us that sources of cash must equal uses of cash. Sources of
cash include cash flows from operations and new external equity. Uses of cash include net
increase in assets (e.g. capital spending and increase in NWC) and dividends. If cash flows
from operation and planned increase in assets do not change, any increase in cash dividends
must be financed by new external equity.
Pumpkin Pie Inc. currently has $1,000 shares outstanding with a total market value of
$42,000. It expects cash flows from operations to be $10,000 next year. It wants to expand its
product lines to include cookies and determines that it is a positive NPV project. The new
product line requires a new oven that costs $8,000.
1. Dividend Policy #1
The dividend policy of Pumpkin Pie Inc. is to pay out any cash that is leftover after investing
in all positive NPV projects. This policy is often referred to as the residual dividend policy.
For next year, Pumpkin Pie Inc. will pay out $2,000 ($10,000 - $8,000) as cash dividend.
Pumpkin Pie stock is selling at $42 per share ($42,000 / 1,000 shares) before the cash
dividend is paid. If there are no personal taxes and the firm pays a $2000 dividend ($2 per
share), the total market value of the firm will fall from $42,000 to $40,000. Ex-dividend share
price will be $40,000/1,000 shares = $40 per share.
2. Dividend Policy #2
Pumpkin Pie is considering a $3,000 cash dividend ($3 per share). Ex-dividend, total assets
of the firm will be $39,000 ($42,000 - $3,000) and each share will sell for $39. After paying
$3,000 in cash dividend, the firm only has $7,000 for capital expenditure. To maintain the
investment policy, the firm must issue $1,000 new equity to purchase the oven. Since these
new shares are sold after the dividends are paid, they should sell at $39 per share. To raise the
$1,000 for the new oven, the firm must issue 25.64 new shares ($1,000 / $39). The value of
the firm will be $40,000 after the new equity issue ($39,000 + $1,000). Both old and new
shares are worth $39 per share ($40,000/1,025.64 shares).
Since the value of the firm is not affected by dividends, dividend policy is irrelevant to
financial managers. Should stockholders care about a firms dividend policy?

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3. Homemade Dividends
Assume that Pumpkin Pie Inc. decides to follow the residual dividend policy (#1) and pays a
cash dividend of $2 per share. Investor A owns 80 shares of stock and prefers to have $3
dividend per share. Will he be better off if Pumpkin Pie switch to dividend policy #2?
Net worth of investor A before dividend payment = $42 x 80 shares = $3,360
Pumpkin Pie pays a $2 dividend per share and the stock falls to $40 per share. Investor A
receives $160 in dividends and his shares are now worth $3,200. His total net worth is still
$3,360.
If Pumpkin Pie pays a $3 dividend per share, investor A would receive $240 in cash ($3
dividend per share x 80 shares). To obtain $240 in cash when Pumpkin Pie only pays $2
dividend, investor A can sell 2 shares of stock ex-dividend ($160 in dividend + $40 x 2
shares). He now owns 78 shares valued at $3,120. His total net worth is again $3,360 ($240 +
$3,120).
If Pumpkin Pie pays a $3 dividend per share, stock price would fall to $39 per share. Investor
A receives $240 in dividends and his shares are now worth $3,120 ($39 x 80 shares). His total
net worth is, of course, $3,360.
Investor A can have $240 in cash and $3,120 in stocks regardless of the firms dividend
policy.
Dividend Policy Decision in the Real World [PowerPoint slide 18-19]
We demonstrated that in the MM World dividend policy is irrelevant. This section focuses on
factors in the real world that violate the MM assumptions. We discuss reasons for favoring a
high dividend policy and reasons for favoring a low dividend policy.

Reasons for Low Dividend

Personal Taxes

High Issuing Costs

Reasons for High Dividend

Information Asymmetry

Dividends as a signal about firms future performance

Lower Agency Costs

capital market as a monitoring device

reduce free cash flow, and hence wasteful spending

Bird-in-the-hand: Theory or Fallacy?

Uncertainty resolution

Desire for Current Income

Clientele Effect
Reasons for Low Dividend
If a firm wishes to increase its cash dividend without changing its investment policy, any
shortfall must be financed externally. Two implications arise:
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1. Taxes
Dividends are taxed as ordinary income as they are received whereas capital gains are taxed
only when they are realized. The firm can avoid (or delay) this drain to the IRS by omitting
dividend and reinvesting the funds in positive or zero NPV investments.
2. Transactions Costs
Individuals who do not want dividends will reinvest them in the firm and incur an
unnecessary brokerage fee. This problem can be reduced through a dividend reinvestment
plan (DRIP). If the firm needs to sell new shares to finance dividend payment it must pay
new issue costs. In Chapter 19 we will see that costs of issuing new equity to the public are
very high. These market imperfections suggest a low dividend payout policy should be
preferred.
Reasons for High Dividend
1. Information Asymmetry and The Information Content of Dividends
Empirical studies find that increases in stock price are associated with announcements of
dividend increases. How can we reconcile this with the dividend irrelevance argument? When
managers know more than outsiders about the future prospects of the firm they can signal
this knowledge to investors through changes in dividend policy. Changes in dividends
consequently have information content and dividend policy is important in a semi-strong
form efficient market.
Increase in dividends is a credible signal about future performance because the higher
dividends cannot be sustained at the firms current performance. If managers lie today by
raising dividends, they will have to cut dividends in the future, a move that very few
managers are willing to make.
2. Lower Agency Cost
We discussed the potential conflicts between stockholders and managers when ownership and
control of a corporation is separated. When a firm pays out dividends, it will need to raise
external funds more often. The primary market acts as a control against managers deviating
from stockholders best interests. The costs of issuing new equity shares are offset by lower
agency costs. Even if a firm does not need to raise external funds, paying out dividends
reduces the amount of free cash flows available to managers and will also reduce agency
costs.
3. Bird-in-the-hand: Theory or Fallacy?
Are near-term dividends less uncertain than dividends in the far future? The riskiness
(uncertainty) of dividends depends on the firms systematic business and financial risk. The
bird-in-the-hand argument implies that the risk of the firm increases over time. There is no
reason to believe that risk increases overtime for all companies.
4. Desire for Current Income
a. Many trusts and endowments can only spend the dividend portion of returns.
b. Some individuals will desire high dividend stocks for current income reasons (the
proverbial widows and orphans). The transaction costs to sell small amounts of stocks at
regular intervals for current income can be very expensive.
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The Clientele Effect


Some investors prefer high dividend payout stocks because of taxes and the desire for current
income. Others prefer low dividend payout stocks. If the aggregate demand is equal to the
aggregate supply for each type of dividend policy stock, then no firm can increase its price
by changing its dividend policy. Dividend policy can only increase shareholder wealth if
there exists an unsatisfied clientele. In fact, when the market is in equilibrium, the clientele
effect implies that changes to a firms dividend policy will reduce shareholder wealth.
Share Repurchase [PowerPoint slide 18-13 through 18-17]
In general, shareholders are better off if the firm buys back its own shares instead of paying
dividends. This allows investors to avoid dividend taxes and choose when to realize capital
gains. Unfortunately, the IRS may challenge regular stock repurchases.
Managers may also use share repurchase to signal that the current market is too low. Security
transactions are zero-NPV investments in efficient capital markets. If markets are semi-strong
form efficient and managers have more information that outside investors, then insiders may
be able to identify when their company is undervalued. Companies can repurchase shares
through a tender offer, the open market, or targeting specific shareholders.
In a tender offer repurchase, setting the offer price can be difficult. If the offer price is set too
low, then stockholders who tender their shares will lose. If the offer price is set too high, then
stockholders who do not tender will lose.
Supplemental Problems
Problem 18.1
Suppose firms A and B are all-equity firms with a 10% cost of equity capital. Initially, both
firms have $1000 in assets and can earn a 10% return on assets with certainty. Firm A pays
out all of its earnings in dividends while Firm B has a 60% dividend payout. Assume that
there are no taxes and that the first dividend is paid at the end of the first year. Find the
market value of equity for both firms.
Solution 18.1
The earnings reinvestment and dividend payout over time for firms A and B are:
Firm A
Year
Div
$1000.0
$1040.0
$1081.6
.
.

Assets

Firm B
NI

Div

Assets NI

1
$1000 $100 $100
$100.00
$60.00
2
$1000 $100 $100
$104.00
$62.40
3
$1000 $100 $100
$108.16 $64.896
.
.
.
.
.
.
.
.
.
.
.
.
and so on forever.
The growth rate for Firm A is 0% and the growth rate for Firm B is 4% (g = ROE x Plowback
Ratio). The market value of Firm A is $100/.10 = $1000. The market value of Firm B is $60/
(.1 - .04) = $1000. The fact that both companies have the same value is consistent with the Modigliani-Miller dividend irrelevance proposition.

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Problem 18.2
Firms C and D have time zero EBIT of $1000. The required return on equity for both of these
unlevered firms is 10%. The marginal corporate tax rate is 34%. Firm C has a dividend
payout ratio of 20% and a dividend growth rate of 8%. Firm D has a dividend payout ratio of
80% and a dividend growth rate of 4%.
a. What is each firm's expected dividend at the end of the next year?
b. Which firm has the higher market value?
c. Given a fixed dividend payout ratio, EBIT must grow at the same rate as dividends.
Calculate the after-tax rate of return on each firm's reinvestment of earnings
(EBIT(l-Tc)/RE).

Solution 18.2
a. DIV = NI (DIV/NI) (1 + g) = (EBT(1-Tc))(DIVIDEND PAYOUT)(1 + g)
DIVC = $1000 (1 - .34) (0.2) (1.08) = $142.56
DIVD = $1000 (1 - .34) (0.8) (1.04) = $549.12
b. MVC = $142.56 / (0.1 - 0.08) = $7128
MVD = $549.12 / (0.1 - 0.04) = $9152
c. Time 0 NIC = $1000 (1 - .34) = $660
Time 0 DIVC = $660 (0.2) = $132
Time 0 REC = NIC - DIVC = $660 - $132 = $528
Time 1 dollar growth in EBIT = EBITC = $1000 (0.08) = $80
After-tax return REC = EBITC (l - T)/REC = $80(1-.34)/$528 = 10%
Similarly, EBITD (1-T) / RED = $40 (1 - .34) / $132 = 20%
Although firm D has a lower dividend growth rate, it has a higher market value because it has
a higher return on reinvested earning

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