Session 6

Weekly Review
• IMF deal to revive US$6bn program where IMF will disburse US$1bn immediately,
• $1bn Sukuk in international bond market,the issue was subscribed by over 2x,
• Inflation Jan’22 at13.0% which was slightly above the estimates and
• trade deficit eased-off considerably to US$3.4bn (down 30%MoM from US$4.8bn .
• RDA reaches $3.1b
• UBL to acquire 84.5% stake in SAMBA
• Cotton arrivals to ginning factory increased by 33%
• IT exports set to reach $3.5 b by June 2022
MBA Executive Course
Business Finance II
Distribution to Shareholders -
chapter 14
Dividend
• Dividend vs. Interest Tax impact
• Cash Cash outflow
• Stock (Bonus shares) Book entry
• Repurchase reducing paid up capital
• Split Increasing or decreasing number of shares

Profit Distribution
• How much to be distributed ?
• Mode of distribution: Dividend, Stock repurchase
• Policy: Steady, stable dividend growth rate, payout ratio
• Optimal policy - balance between dividends & growth, to increase firm’s stock price.
• Irrelevance theory: Miller and Modigliani (MM) Model: dividend

policy has no effect on either the value of its stock or it's cost of capital.
Profit Distribution –contd.
• policy of steadily increasing dividend. provides investors with stable, dependable

income, & departures from it give signals about future earnings.
• Residual distribution set the long-run target distribution at a level that will permit
the firm to meet its equity requirements with retained earnings.
• Stock repurchase plan, a firm buys back some of its outstanding stock
• Legal constraints, investment opportunities, availability and cost of funds from other
sources, and taxes are also considered when firms establish dividend policies
• stock split “divide the pie into smaller slices.” if: (1) The price is quite high.
• stock dividend and splits are to keep stock prices within an “optimal” trading range.
• dividend reinvestment plan (DRIP)
Profit Distribution ….. Contd.
• Dividend preference theory:

firm’s value will be maximized by a high dividend payout ratio, as investors regard
cash dividends as being less risky than potential capital gains.
• The tax effect: long-term capital gains are subject to lower taxes than dividends,
investors prefer to have companies retain earnings rather than pay.
• signaling hypothesis/information content hypothesis.
• clientele effect suggests that a firm will attract investors who like the firm’s payout
ST 1 and ST 2
• Components Manufacturing Corporation (CMC) has 1 million shares of stock outstanding. CMC has a
target capital structure with 60% equity and 40% debt. The company projects net income of $5
million and investment projects requiring $6 million in the upcoming year.
• a. CMC uses residual distribution model. What is the projected DPS?
• b. What is the projected payout ratio?
• (ST-2) Burns & Kennedy Corporation (BK) has a value of operations equal to $2,100, short-term
investments of $100, debt of $200, and 100 shares of stock.
• a. What is BK’s estimated intrinsic stock price?
• b. If BK encash investments and pays $100 in dividends, what will be intrinsic stock price?
• c. If BK encash short-term investments to cash and repurchases $100 of its stock, what is the
resulting estimated intrinsic stock price and how many shares remain outstanding
Problem 14-4 to 14 -6
• The Wei Corporation expects next year’s net income to be $15 million. Firm’s debt ratio is 40%.
Wei has $12 million of profitable investment opportunities, and it wishes to maintain its existing
debt ratio. According to the residual distribution model (assuming all payments are in the form
of dividends), how large should Wei’s dividend payout ratio be next year
• A firm has 10 million shares outstanding with a market price of $20 per share. The firm has $25
million in extra cash (short-term investments) that it plans to use in a stock repurchase; the
firm has no other financial investments or any debt. What is the firm’s value of operations, and
how many shares will remain after the repurchase?
• JPix management is considering a stock split. JPix currently sells for $120 per share and a 3-for-
2 stock split is contemplated. What will be the company’s stock price following the stock split,
assuming that the split has no effect on the total market value of JPix’s equity?
Challenge level
Boehm Corporation has stable growth of 8% for the past 10 years and in 2016 Boehm paid dividends of
$2.6 million on net income of $9.8 million.In 2017 earnings expected to 12.6m, Boehm plans to invest
$7.3 m in a plant expansion. This one-time unusual earnings growth won’t be maintained, and after
2017 Boehm will return to its previous 8% earnings growth rate. Its target debt ratio is 35%.
• a. Calculate Boehm’s total dividends for 2017 under each of the following policies:
• (1) 2017 dividend as per long-run growth rate in earnings
• (2) It continues the 2016 dividend payout ratio.
• (3) It uses a pure residual policy (35% of the $7.3 million investment is financed with debt).
• (4)Regular dividend based on long-run growth rate and extra dividend according to the residual policy.
• b. Which of the preceding policies would you recommend? Restrict your choices to the listed, justify
• c. Does a 2017 dividend of $9 million seem reasonable? If not, should the dividend be higher or lower

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Weekly Review

• Dividend vs. Interest Tax impact

• Cash Cash outflow

• Stock (Bonus shares) Book entry

• Repurchase reducing paid up capital

• Split Increasing or decreasing number of shares

• How much to be distributed ?

• Mode of distribution: Dividend, Stock repurchase

• Policy: Steady, stable dividend growth rate, payout ratio

• Irrelevance theory: Miller and Modigliani (MM) Model: dividend

• policy of steadily increasing dividend. provides investors with stable, dependable

• Dividend preference theory:

• signaling hypothesis/information content hypothesis.

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