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MAS7349
Corporate Finance:
The distribution of company net profits back to shareholders commonly referred to as payout policy is usually in the form of a dividend payment or the buying back of previously issued shares usually at a premium to their market price (share buyback). Essentially, a dividend payment or share buyback is the same; that is, intended to return previously generated income back to shareholders, however, there may be different tax implications associated with each distribution structure. In Australia, like many other developed countries, the largest companies by market capitalisation (share price multiplied by a number of shares on issue), usually have relatively high stable payout policies. For example, the top 20 Australian listed corporates generally have payout policies at 70 percent or above for every one dollar of net profit distributed. The remaining net income is usually reinvested back into the company for future growth opportunities. Companies that have stable dividend policies over time can also be more accurately priced using dividend based asset pricing models. Companies that dont pay dividends or indeed, dont have a solid dividend payout history, can be somewhat more difficult to price as analysts would be required to estimate their free cash flows in order to price them accurately.
Question:
a. A firms payout policy can be expected to change over time as the firm moves through its life cycle. Explain the life-cycle theory of payout policy.
b. It is often argued that agency costs are significantly reduced for companies with relatively high payout policies. Outline the ways in which agency problems may be mitigated through companies adopting a stable payout policy.
Uploaded By : celina
Posted on : April 03rd, 2018
Downloads : 0
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