Increasing Shareholder Value Distribution Policy, A Corporate Financ
Corporations earn incomes and amass wealth. There are many books offering advice how to increase the profitability of corporations by achieving excellence in operations and choosing the correct strategic path. Increasing Shareholder Value: Distribution Po
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INCREASING SHAREHOLDER V ALUE Distribution Policy, A Corporate Finance Challenge
by
Harold Bierman, Jr. The Nicholas H Noyes Professor of Business Administration The Johnson Graduate School of Management Cornell University Ithaca, New York
SPRINGER SCIENCE+BUSINESS MEDIA, LLC
Library of Congress Cataloging-in-Publication Data Bierman, Harold. Inereasing shareholder value:distribution poliey, a eorporate finanee ehallenge Iby Harold Bierman, Jr. p.em. Includes bibliographieal referenees and index. ISBN 978-1-4613-5587-8 ISBN 978-1-4615-1505-0 (eBook) DOI 10.1007/978-1-4615-1505-0 1. Corporate profits. 2. Ineome distribution. 3. Investments--Valuation. 4.
Corporations--Finanee. 5. Stoekholders. I.Title HG4028.P7 B54 2001 658.15'5--de21 2001038524
Copyright @) 2001 Springer Science+Business Media New York Originally published by Kluwer Academic Publishers in 2001 Softcover reprint of the hardcover 1st edition 2001 AII rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photocopying, record ing, or otherwise, without the prior written permission of the publisher, Springer Science+Business Media, LLC.
Printed on acid-free paper.
TABLE OF CONTENTS
vii
Preface 1.
An Overview of Corporate Distribution Policy
.
2.
Dividends Versus Retained Earnings
3
3.
Dividends Versus Share Repurchase
21
4.
Share Repurchase and Stock Price
43
5. Choosing Between Real Investments and Share Repurchase
67
6. The Return Earned by Share Repurchase
77
7.
Share Repurchase and Earnings Per Share Buyback Parity
85
8.
A Dividend Reduction Strategy
97
9.
The Investor's Viewpoint..
III
10. Dividend Reinvestment Plans (DRIP's)
123
11. Repurchase of Shares Accompanied by the Selling of Puts
131
12. A Ranking of Alternatives
137
Index
149
Increasing Shareholder Value Distribution Policy, a Corporate Finance Challenge
Preface
Corporations earn incomes and amass wealth. There are many books offering advice how to increase the profitability of corporations by achieving excellence in operations and choosing the correct strategic path. This book is concerned with how the corporation should reward its shareholders after the incomes are earned. Chapters where there are potentially complex mathematical relationships are divided into two parts. The body of the chapter has the relevant basic conclusions and numerical examples. The appendices to the chapter contains the derivation of the formulas that are used, if the derivations are not relatively intuitive. The appendices can be skipped if you are willing to accept the formulas used in the chapters. Harold Bierman, Jr. Cornell University Ithaca, New York
Chapter 1 An Overview of Corporate Distribution Policy
The managing director (MD) of one of the world's five largest investment banks was teaching a real live case in my finance case course. He concluded that the healthy firm being discussed should reduce or eliminate its dividend on its stock. A visiting professor
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