Chapter 16
The Dividend Controversy
· The dividend controversy boils down to arguments about imperfections, inefficiencies or whether stockholders are fully rational.· Drei Denkansätze
1. Dividendenpolitik hat keinen Einfluss auf den Unternehmenswert.
(e.g., Miller/Modigliani 1961)
Annahmen:
o perfekte Kapitalmärkte, d.h. keine Transaktionskosten
o keine Steuern
Given that there are no taxes, information asymmetry or transaction costs, the firm can choose any dividend policy without affecting the stream of CFs received by shareholders. Thus, two firms that are identical in every respect except for their dividend payout should have the same value.
When there are dividend payouts, this means that the firm will have to give up capital. This capital loss is borne by the shareholders. Thus, dividend payouts and capital losses merely offset each other. Knowing this, it should not matter to investors how high dividends are. Meanwhile, firms ought not worry about dividend policy.
2. Dividenden haben einen Steuernachteil.
(e.g., Miller/Modigliani 1963)
The best form of payment to shareholders is the one subject to least taxation. As long as the tax rate on capital gains is lesser than the personal tax rate, shareholders will prefer capital gains to dividends.
3. Aktionäre haben eine Präferenz für Dividenden. Dividenden signalisieren zukünftige Unternehmensperformance.
The dividend per se does not affect the value of the firm. But it serves as a message from management that the firm is anticipated to do better.
Investors can distinguish real money makers from marginally profitable firms through an analysis of dividend policy. If for instance a company reports good earnings and simultaneously pays generous dividends, then it is truly profitable. Firms could possibly pretend this, but pretence cannot last long. Cash is required for that.
Dividend policy could affect firm value when investors prefer high payouts and are reluctant to invest in firms that finance mainly through retained earnings.
· Dividends may take on other forms: automatic reinvestment plans, non-cash dividends, stock splits, share repurchases.
Share repurchases relay the information that the firm has accumulated more cash that they can invest profitably. It can also mean that the firm wishes to increase its debt percentage levels. These are not really good news, but investors find this more often than not good. Empirically, stock prices rise after stock repurchase announcements. Repurchases could signal good future prospects. They can also be taken to mean that the company will not simply squander money. (For firms, the advantage is that this is only one-time, whereas dividend payout is continual.)
· Rahmenbedingungen der Dividendenpolitik:
o Nationale Gegebenheiten (Handelsrecht, Steuerrecht, Finanzmarktpraxis, etc.)
o Branchenbesonderheiten (z.B., Banken mit gesetzlichen Eigenmittelregelungen)
o Unternehmensspezifische Charakteristika (KMU, Kapitalmarktbezug, AGs, usw.)
o Aktionärsstruktur und privates Vermögen (Mehrheiten und Minderheiten, Familienstruktur, usw.)
Für kleine, personen- bzw. familiengebundenen Gesellschaften: kein generell zutreffendes theoretisches Handlungskonzept.
Für Eigenkapitalknappe KMU: Berücksichtigung der Kapitalstrukturpolitik und Risikopolitik in Kombination mit den aktionärsseitigen Einkommens- und Konsumpräferenzen. Die Dividendenpolitik fällt direkt mit der investitions- und risikopolitischen Entscheidungsfindung zusammen.
Für reine Publikumsgesellschaften: Relevanz vs. Irrelevanz der Dividendenpolitik wie oben dargestellt. Aus steuerlicher Sicht wären unter den heutigen Umständen eher zurückhaltende Ausschüttungen angebracht.
· Höhe der Ausschüttungen: (Faktoren)
o Aktionärspräferenzen: Aktionäre in tieferen Einkommensklassen ziehen tendenziell höhere Dividenden vor.
o Agency-Aspekte: Dividendenzahlungen sind eine Art externe Kontrollgrösse, und der Abfluss verfügbarer Mittel reduziert die Gefahr von Fehlinvestitionen seitens des Managements
o Signalling-Effekte: Gesellschaften können mit Dividendensatz-Erhöhungen positive Signale aussenden.
In der Praxis dominiert konstante Dividendenauszahlungen gegen der gewinnabhängigen Auszahlungen. Es empfiehlt sich i.d.R. eine stabile Dividendenpolitik. Änderungen führen zu Transaktionskosten und der sogenannter „clientele effect“. (You lose your clients because of the imposed transaction costs.)
· Ein ausgewogenes Dividendenverhalten kann man zumeist als zweckmässig erachten:
o Beschränkte Ausschüttungen
o Stabile Dividendenhöhe
o Stabile Dividendenpolitik / B/M
Labhart
C/W
B/M
Labhart
C/W
Labhart
C/W
B/M
B/M
Volkart
Volkart
Skript
Chapter 17 &18
Does Debt Policy Matter?/How Much Should a Firm Borrow?
· The manager has to find the combination of securities that maximizes the value of the firm or that maximizes shareholder value.No complete satisfactory theory has been found for the existence of an optimal capital structure. Casual empiricism suggests that firms behave as though it exists.
If there is a target dividend payout, then there must also be a target debt/equity ratio
· Miller/Modigliani I: Financing decisions do not matter.
Any combination of securities is as good as another. The value of the firm is unaffected by its choice of capital structure.
Assumptions:
o perfekte Kapitalmärkte, d.h. keine Transaktionskosten
o keine Steuern
o same borrowing and lending rate
o no bankruptcy costs
o no agency costs
o only two types of claims: debt and equity
o all firms of the same risk class
In well-functioning markets, two investments that offer the same payoff must have the same cost. Thus, two firms that offer the same stream of operating income and differ only in their capital structure must have the same cost. Therefore, the value of an unlevered firm must equal the value of the levered firm.
As long as investors can borrow/lend on their account on the same terms as the firm, they can “undo” the effect of any changes in the firm’s capital structure. Thus, debt policy should not matter.
Law of conservation of value: The value of an asset is preserved regardless of the nature of the claims against it. As proposed by value additivity, the value of a firm can be segregated into the corresponding PVs of the components. Firm value is in this case determined by the left side of the balance sheet (i.e., real assets) and not by how much debt and how much equity there are.
But MM I does not hold in practice. Financial managers do worry about debt policy:
o Taxes play a role.
o Bankruptcy is painful.
o There are conflicts of interest between the firm’s security holders.
o There are incentive effects of financial leverage on management’s investment and dividend payout decisions.
· Miller/Modigliani II: The value of the levered firm is equal to the value of the unlevered firm plus the present value of the tax shield provided by the debt, i.e., the gain from leverage.
New assumptions: corporate tax, no personal tax
If the government allows the deduction of interest payments on debt as an expense, the market value of the corporation can increase as it takes on more and more debt.
But MM Proposition II is an extreme proposition. If the PV of the tax shield increases the after-tax value of the firm, then the firm should ideally take on 100% debt. This is wrong because:
o It will appear that debt is fixed and perpetual. It is wrong to think of debt as such.
o Many firms face marginal tax rates less than 35%.
o Tax shields can only be used when there are future profits to shield. No firm can absolutely be sure of that.
o There are other factors that offset the PV of the tax shield. Firms incur for example bankruptcy costs.
Given corporate and personal taxes: The firm should arrange its capital structure so as to maximize after-tax income. It should try to minimize the PV of all tax paid on corporate income. This includes the personal taxes paid.
In the end, the gain from leverage when personal taxes are considered is lower.
Assuming that all firms are subjected to the same tax rate (Miller), debt policy becomes irrelevant when . The before-tax return on bonds has to be high enough, if the personal income tax on stocks is less than the tax on bonds. Otherwise, no investor would want to hold bonds.
The value of the levered firm is in this case:
· Extreme levels of debt are also inadvisable because of the risk/return tradeoff. Any increase in expected returns is offset by an increase in risk, and thus, the shareholders’ required rate of return also increases.
· Moreover: Tradeoff theory of capital structure: Costs of financial distress matter. There is a tradeoff between tax shields and costs of financial distress.
VL= VU + PV(tax shield) – PV (costs of financial distress)
The theoretical optimum of debt is reached when:
PV(tax savings due to additional borrowing) = increases in the PV(costs of distress)
Thus, target debt ratios may vary from firm to firm. High ratios are expected from companies with safe, tangible assets and plenty of taxable income to shield. Low target ratios are expected from companies with risky, intangible assets.
Effect of bankruptcy costs: If there are bankruptcy costs, then payments must be made to third parties other than bond and shareholders. The value of the firm will be lower than the discounted expected CFs. As the proportion of debt is increased, the probability of bankruptcy increases. Hence, the optimal capital structure results from a consideration of the required rate of return of debt claims. In the end, WACC must be minimized.
· “Traditional” position: The objective is not just to maximize overall market value but also to minimize WACC. A moderate degree of financial leverage may increase the expected equity return, although not to the degree predicted by Proposition II. Imperfections make borrowing costly and inconvenient.
· Another factor leading to the violation of M/M II: government manipulations
· Signalling Hypothesis: There is a projected optimal capital structure. Managers convey information to the market through their financial policy decisions. That includes changes in capital structure and dividend policy. Signals cannot be mimicked by unsuccessful firms. This is also evident in Myer’s pecking order theory.
· Pecking order theory: Retained earnings, debt, equity. Asymmetric information affects the choice between internal and external financing and between new issues of debt and equity securities. There is no well-defined target ratio. The attraction of tax shields is second-order. Highly profitable firms with limited investment opportunities are the ones with low debt ratios. On the other hand, firms, whose investment opportunities outrun internally generated funds are driven to borrow.
· Effect of agency costs: There is a trade-off between tax shield benefits and agency costs. There is an optimal capital structure that minimizes agency costs.
· There are other ways to shield income against tax, e.g., by means of write-offs. Corporate tax shields from debt are worth more to some firms than to others. Firms with plenty of non-interest tax shields and uncertain prospects should borrow less than consistently profitable firms with lots of taxable income to shield. / B/M
C/W
B/M
C/W
B/M
B/M
C/W
B/M
C/W
B/M
B/M
B/M
B/M
B/M
B/M
B/M
Chapter 19
Financing and Valuation
· Weight-Adjusted Capital Cost (WACC) FormulaGrundformel:
Berücksichtigung von Ertragssteuern:
Note: WACCs < WACC, since the tax advantages of debt financing are accounted for.
When there are more than two sources of financing:
· Note further that only long-term financing is considered in WACC. Leaving out the cost of short-term debt is actually incorrect, except when such is only temporary, seasonal or incidental short-term financing.
· All the variables in the WACC applies to the entire firm. Thus, the formula will give the right discount rate only for projects, whose cost of capital is just like that of the firm.
· Entity Approach vs. Equity Approach: The entity approach entails discounting the CFs by the chosen company WACC formula. This implies that the debt ratio is expected to be relatively stable. Under the equity approach, the CFs are discounted at the cost of equity (after interest and after taxes). If the company’s debt ratio is stable, the method should give the same answer as discounting at the WACC and subtracting debt. But this depends on the financial leverage; that is, on the financial risk, as well as the business risk of the firm. If financial leverage will change significantly, discounting flows to equity at the cost of equity will not give the right answer.
For banks, the equity approach is the ideal method for valuation purposes. This is because the bank creates value on the liabilities side of its balance sheet. A positive spread that creates value for shareholders comes when the cost of issuing deposits (e.g., interest expenses, check clearing and tellers) is lower than the cost of raising an equivalent amount of funds with equal risk in the open market. The equity approach is appropriate, because it treats liabilities management as part of the business operations. On the other hand, the entity approach is difficult to use, because the cost of capital for non-interest-bearing customer deposits, which are main sources of financing, is then difficult to estimate. Moreover, as the retail bank division is legitimately a separate business, it is quite difficult or impossible to get the discounted value by first valuing its assets via interest income less administrative expenses and then subtracting the PV of the deposit business. Still another problem is the fact that the spread between the interest received on loans and the cost of capital is so low. Small errors in estimating the cost of capital can result in huge swings in the calculated value of equity.
· Adjusted Present Value (APV): APV is useful when side effects (e.g., costs of issuance, interest tax shields, and government subsidized loans tied to the project) are relevant.
1. Value the project as if it were a firm financed solely by equity.
2. Add or subtract the PV of side effects.
Discounting CFs at the WACC and calculating the APV will give nearly identical answers, given consistent assumptions.
· Adjusted Cost of Capital: This is an adjusted opportunity cost or hurdle rate that reflects the financing side effects of an investment project.
The rule is: Accept projects with positive NPVs at the adjusted cost of capital.
If you know the adjusted cost of capital, you do not have to calculate the APV. Use NPV and discount at the adjusted cost of capital. / Skript
B/M
B/M
B/M
C/K/M
B/M
B/M