A B C D E F

1 Tool Kit Chapter 14

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3 Distributions to Shareholders: Dividends and Repurchases
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5 14-2 Procedures for Cash Distributions
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7 Declaration date: Thursday, November 21, 2019
8 Dividend goes with stock: Tuesday, December 17, 2019
9 Ex-dividend date: Wednesday, December 18, 2019
10 Thursday, December 19, 2019
11 Holder-of-record date: Friday, December 20, 2019
12 Payment date: Friday, January 10, 2020
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15 14-7 Setting the Target Distribution Level: The Residual Distribution Model
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17 The optimal distribution ratio for a firm is a function of four factors. (1) Investors' preferences for dividends versus capital gains. (2) The fi
18 investment opportunities. (3) Its target capital structure. And (4), the availability and cost of external capital.
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20 The last three elements can be combined into the residual distribution model. Within the residual model, firms must determine the optimal
21 capital budget, determine the amount of equity needed to fund the capital budget (based upon the target capital structure), use reinvested
22 earnings to meet equity requirements whenever possible, and make distributions to shareholders only if more earnings are available than a
23 needed for dividends. The residual model can be expressed as:
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25 Distributions = Net Income - [(Target equity ratio) * (Total capital budget)]
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27 Consider a firm whose net income for the current year is $100 million, their target equity ratio is 60%, and the expected capital
28 budget is $50 million. What are its distributions to be made to shareholders, according to the residual model?
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30 Net Income $100
31 Target equity ratio 60%
32 Total capital budget $50
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34 Distributions = Net Income - [(Target equity ratio) * (Total capital budget)]
35 = $100 - 60% *
36 = $70
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38 Distribution = 70.0%
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40 What if the expected capital budget rose to $166.67 million?
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42 Total capital budget $166.67
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44 Distributions = = Net Income - [(Target equity ratio) * (Total capital budget)]
45 = $100 - 60% *
46 = $0
47
48 Distribution = 0.0%
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50
51 The firm could not have a negative dividend, so a negative distribution must be a stock issue rather than a stock repurchase. Under
the residual policy, if investment opportunities exceed net income, the firm should pay zero dividends and issue stock (or else
52 increase its debt ratio to fund the investment opportunities).
 G H I J
1 11/21/2018
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Dividends and Repurchases
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stors' preferences for dividends versus capital gains. (2) The firm's
18 capital.
bility and cost of external
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20 firms must determine the optimal
. Within the residual model,
21 capital structure), use reinvested
dget (based upon the target
22 if more earnings are available than are
ions to shareholders only
23
24
25
ty ratio) * (Total capital budget)]
26
27and the expected capital
arget equity ratio is 60%,
28model?
according to the residual
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30
31
32
33
34
ty ratio) * (Total capital budget)]
35 $50
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37
38
39
40
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44
ty ratio) * (Total capital budget)]
45 $167
46
47
48
49
50
be a stock issue rather than
51 a stock repurchase. Under
hould pay zero dividends and issue stock (or else
52
SECTION 14-7
SOLUTIONS TO SELF-TEST

Hamilton Corporation has a target equity ratio of 65%. Its capital budget is $2 million. If Hamilton has net income of
$1.6 million and follows a residual distribution model, how much will its distribution be?

Capital budget = $2,000,000

Target equity ratio = 65%
Net income = $1,600,000

Residual distribution = $300,000

SECTION 14-9
SOLUTIONS TO SELF-TEST

A firm's most recent FCF was $2.4 million; the FCF is expected to grow at a constant rate of 5%. The WACC is 14% and there are 2 million shares outstand
firm has $12 million in short-term investments which it plans to liquidate distribute in a stock repurchase; the firm has no other financial investments or
Verify that the value of operations is $28 million. Immediately prior to the repurchase, what are the intrinsic value of equity and the intrinsic stock price
many shares will be repurchased? How many shares will remain after the repurchase? Immediately after the repurchase, what are the intrinsic value of e
and the intrinsic stock price?

Note: All values in millions except per share data.

FCF = $2.4 million
g= 5%
WACC = 14%
nPrior = 2.0 million
Short-term investments (Extra cash) = $12 million

Note: All values in millions except per share data.

Prior Repurchase After Repurchase
Value of operations $28.0 $28.0 million
+ Value of nonoperating assets 12.0 0.0 million
Total intrinsic value of firm $40.0 $28.0 million
− Debt 0.0 0.0 million
− Preferred stock 0.0 0.0 million
Intrinsic value of equity $40.0 $28.0 million
÷ Number of shares 2.0 1.4 million
Intrinsic stock price $20.00 $20.00

# shares repurchased = 0.6

 nd there are 2 million shares outstanding. The
m has no other financial investments or debt.
of equity and the intrinsic stock price? How
rchase, what are the intrinsic value of equity
SECTION 14-13
SOLUTIONS TO SELF-TEST

Suppose you have 1,000 common shares of Burnside Bakeries. The EPS is $6.00, the DPS is $3.00, and the stock sells for
$90 per share. Burnside announces a 3-for-1 split. Immediately after the split, how many shares will you have, what will
the adjusted EPS and DPS be, and what would you expect the stock price to be?

Shares 1,000
EPS $6
DPS $3
Stock price $90
Split factor (n-for-1) 3

Shares 3,000

EPS $2.00

DPS $1.00

Price $30.00