Corporate Finance: Instructor\'s Manual Applied Corporate Finance

Aswath Damodaran 455

A Practical Framework for Analyzing Dividend Policy

HWohawt m itu ccohul ddi dh (^) athvee fipramid p oayu (^) tout? HoWwh maut cith a (^) ccotuualldly ipt haaidv oeu atfforded to pay out?
N- (eCta Inp cEoxm - eDepr!n) ( 1 - DR) D+i vEiqdueintyd Rsepurchase

• = C FChgF WEorking Capital ( 1 - DR)

FFCirmF (^) Ep a>y sD (^) iovuidt (^) etondos little Firm pays out too much
FCFE < Dividends
Dyoou (^) ry ocuas thr?ust managers in the company wtih
CLoomokp^ aatr^ epasRt^ OproEj etoc tC^ cohsoti coef :Equity
ROC to WACC
Wfirhma ht (^) ainvvee?stment opportunities does the
CLooomkp^ aatr^ epasRt^ pOroE ejtoct C^ cohsoti coef: Equity
ROC to WACC
gFiormod^ h parso^ hjeisctot cryh^ oofic^ e
athned f guotuorde projects in
oFifr pmo^ hoars p^ hroisjteocrty
choice
Fpirromje hcatss good Fpriromje hctass poor
flGeivxeib^ militayn taog keerse^ tph e^
cdaivsidhe anndds set
Fjuosrticfey hmoaldniangge rcsa tsoh (^)
ostro recktuhornl (^) dceasrsh to
Fcuirtm d (^) isvhidouelndd (^) s
amnodr (^) ere invest
Fwiirthm istsh ionuvldes dtemael (^) nt
tphroenbl ecumt dfirisvtid^ aenndd^ s

Most firms return less in cash than they have available to return. Whether they

will find themselves under pressure (like Chrysler) or relatively untouched (like

Microsoft) will depend upon how much stockholders trust the managers of the

firm to use the cash wisely.

Stockholders will tend to be less aggressive about demanding that the cash be

returned to them for firms

With a good investment track record

In a sector with high returns

Where managers have substantial equity stakes in the firm

They will tend to be most aggressive when these conditions do not hold.