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    PowerPoint Presentation6 by DR - Mark 28

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    PowerPoint Presentation6 by DR - Mark 28

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    gatesbank375
    6 views6 pages
    seeee

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    PowerPoint Presentation6 by dr.mark 28

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    Copyright:

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    6 views6 pages

    PowerPoint Presentation6 by DR - Mark 28

    Uploaded by

    gatesbank375
    seeee

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 6

    The Mechanics of Payout Policy: Cash

    Dividend Payment Procedures (cont.)

    When the dividend was announced by the directors, $63


    million of the retained earnings ($0.15 per share × 420
    million shares) was transferred to the dividends payable
    account. The key accounts thus became:
    – Cash: $1,826,000
    – Dividends payable: $63,000
    – Retained earnings: $5,734,000

    © 2012 Pearson Prentice Hall. All rights reserved. 14-15


    The Mechanics of Payout Policy: Cash
    Dividend Payment Procedures (cont.)

    When Best Buy actually paid the dividend on October 26,


    this produced the following balances in the key accounts of
    the firm:
    – Cash: $1,763,000
    – Dividends payable: $0
    – Retained earnings: $5,734,000
    The net effect of declaring and paying the dividend was to
    reduce the firm’s total assets (and stockholders’ equity) by
    $63 million.

    © 2012 Pearson Prentice Hall. All rights reserved. 14-16


    The Mechanics of Payout Policy:
    Share Repurchase Procedures
    • Common methods for repurchasing shares include:
    – An open-market share repurchase is a share repurchase program in which
    firms simply buy back some of their outstanding shares on the open market.
    – A tender offer repurchase is a repurchase program in which a firm offers to
    repurchase a fixed number of shares, usually at a premium relative to the
    market value, and shareholders decide whether or not they want to sell back
    their shares at that price.
    – A Dutch Auction repurchase is a repurchase method in which the firm
    specifies how many shares it wants to buy back and a range of prices at
    which it is willing to repurchase shares. Investors specify how many shares
    they will sell at each price in the range, and the firm determines the minimum
    price required to repurchase its target number of shares. All investors who
    tender receive the same price.

    © 2012 Pearson Prentice Hall. All rights reserved. 14-17


    The Mechanics of Payout Policy:
    Share Repurchase Procedures (cont.)

    © 2012 Pearson Prentice Hall. All rights reserved. 14-18


    The Mechanics of Payout Policy: Tax Treatment
    of Dividends and Repurchases

    • For many years, dividends and share repurchases had very different
    tax consequences.
    – The dividends that investors received were generally taxed at ordinary
    income tax rates.
    – On the other hand, when firms repurchased shares, the taxes triggered by that
    type of payout were generally much lower.
    • Shareholders who did not participate did not owe any taxes.
    • Shareholders who did participate in the repurchase program might not owe any
    taxes on the funds they received if they were tax-exempt institutions, or if they
    sold their shares at a loss.
    • Shareholders who participated in the repurchase program and sold their shares for
    a profit only paid taxes at the (usually lower) capital gains tax rate, and even that
    tax only applied to the gain, not to the entire value of the shares repurchased.

    © 2012 Pearson Prentice Hall. All rights reserved. 14-19


    The Mechanics of Payout Policy: Tax Treatment
    of Dividends and Repurchases

    The Jobs and Growth Tax Relief Reconciliation Act of 2003


    significantly changed the tax treatment of corporate dividends for most
    taxpayers.
    – The act reduced the tax rate on corporate dividends for most taxpayers to the
    tax rate applicable to capital gains, which is a maximum rate of 5 percent to
    15 percent, depending on the taxpayer’s tax bracket.
    – This change significantly diminishes the degree of “double taxation” of
    dividends, which results when the corporation is first taxed on its income and
    then when the investor who receives the dividend is also taxed on it.
    – After-tax cash flow to dividend recipients is much greater at the lower
    applicable tax rate; the result is noticeably higher dividend payouts by
    corporations today than prior to passage of the 2003 legislation.

    © 2012 Pearson Prentice Hall. All rights reserved. 14-20

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