FNCE10001 Chapter Notes - Chapter 17: Free Cash Flow, Share Repurchase, Liquidating Distribution
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Payout policy = way a firm chooses between alternative uses of free cash flow
Retain
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> invest in new projects or increase cash reserves
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Pay out
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> repurchase shares or pay dividends
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Free cash flow can be retained or paid out
Dividends:
Board of directors determine amount of dividend, sets amount per share to pay and when payment
occurs
Declaration date = date on which board authorises the dividend
Record date = date on which firm pays dividend
Takes 3 business days for shares to be registered
Ex
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dividend date = date two business days prior to record date
Payable/distribution date = firm mails dividend checks to registered shareholders (about a month
after record date)
Most companies pay at regular, quarterly intervals
Occasionally, firm pays a one
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time special dividend larger than usual dividend
Stock split/dividend = each owner of one share receives additional shares
Dividends are a cash outflow
Dividends reduce firm's retained earnings
A return of capital is taxed as a capital gain rather than a dividend
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Dividends may be attributed to other sources such as paid
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in capital or liquidation of assets, in which
it is a return of capital or liquidating dividend
Share repurchases:
Alternative way to pay cash to investors
Firm uses cash to buy back shares of its own stock, holds them in corporate treasury and can be
resold to raise money in future
Most common way
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Firm announces its intention to buy shares in the own market
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May take a year or more to buy back shares
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Not obligated to repurchase full amount it stated
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Firm must not buy in a way that might appear to manipulate price
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Open market repurchases
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Firm offers to buy shares at a prespecified price during a short time period
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Price is set at a premium (10
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20%) to current market price
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Only occurs if shareholders tender a sufficient number of shares; if not, firm may cancel
offer and no buyback occurs
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Related method is Dutch auction share repurchase
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firm lists different prices it is
prepared to buy shares, shareholders indicate how many shares they are willing to sell,
firm pays lowest price at which is can buy back desired number of shares
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Tender offer
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Purchase shares directly from a major shareholder
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Purchase price is negotiated directly with seller
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May occur if major shareholder desires to sell large number of shares but market is not
liquid enough to sustain sale without affecting price
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Shareholder may be willing to sell shares back at a discount to current market price
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If a major shareholder is threatening to take over firm and remove management, firm
may buy out shareholder at a premium (greenmail)
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Targeted repurchase
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3 possible transaction types for a share repurchase
Distributions to Shareholders
Saturday, 20 May 2017 6:41 PM
Principles of Finance Page 1