Dividends policy are defined that a payout made by a company to its shareholder members. When a company made a profit, managers always put those money to two uses: one is reinvested in the business; the other one is paid to shareholders as dividends. As M&M argued, there are no link between dividends and shareholder value in the perfect market environment. On the other hand, difference distribution for dividend will cause shareholder wealth gain or loss. For example, clientele effect, agency theory, 'bird-in-the-hand' theory and also tax reasons will efficiently demonstrate the change of dividend distribution. Following part will be discussed effect of dividend distributions under tax policy changed.
In the real world, as Wall Street reported that, UK government decided rising tax to 62% of profits from 50% on new field, and up 81% from 69% on older field on North Sea oil earnings. It will not only effect the oil price going down, but also cause the company devalue of their share prices and influence the investment action. For example, EnQuest, a 100% UK based company, it gained the average oil price of $75 per barrel, and its Net Asset Value (NAV) is 95 pence. If its oil price rise to $80 per barrel from $75, its NAV would declined by 13%, because of the change of tax policy by UK government.
If a company's shareholders pay more tax on dividend than their capital gains, they prefer to choose lower dividend distributions. According to Arnold (2008) shows than the UK capital gains are taxed at 18 per cent in the recent year. However, it is much higher tax payout in the oil industry comparing with others. So the useful solution showed by Brown, he encourage the corporations choice lower dividend,higher investment under the tax systems. If a corporation decide lower their dividend for shareholders, the company will reduce liability as much as they can. And using those funds put on the investment also increase their shareholders wealth.
In conclusion, tax systems will effect the distributions of dividends on shareholders. In order to maximise shareholder wealth, managers tend to choose the best way to distribution dividends and volume of investments.
Sunday 10 April 2011
Sunday 3 April 2011
How the capital structure impact on the shareholders' wealth?
Modigliani and Millar (1958) though that there are no impact on the WACC to enhance the shareholders' wealth. They explained: first, individuals can borrow as the same rate as corporations; secondly, there are no taxation and financial distress for the company. Based this theory, managers need as much debt as possible, due to cheaper debt, higher value of shareholders. Is that true?
Wall Street reported a news that "Schaeffler cuts stake in Continental to reduce debt" on this Monday. What things caused this huge debt existing? Schaeffler cost 12 billion euros to acquisition its larger viral Continental on August 2008.
What reason causes larger company Continental have to bid with Schaeffler? Because of the Lehman Brothers collapse, the wake of stock market impact on the Continental forced bid with Schaeffler. According to primer CEO of Continental, Manfred Wennemer expressed that he had tired to preserve the independence of the company. So it led to Continental accept bid with Schaeffler on August 2008. Karl-Thomas Neumann instead of Wennemer was a new CEO of Continental on September 2008.
Schaeffler have to delay taking a majority stake until 2012 when they faced those huge debts. In fact, Schaeffler announced that they plan to reduce 15 per cent total stake of Continental to 1.8 billion euros from 12 billion euros recently which caused the share price of Continental up 2.9 per cent. However, they still have nearly 6 billion euros debt from their operation, even cut the cost of acquision to 4.6 billion euros.
Schaeffler launched a takeover bid for Continental in order to maxmize the value of their shareholders. However, increasing huge debt was further burdened by Schaeffler acqusition. It does not bring benefits, but also taking financial risk for company. It will also affect the attractive investment capability and even worse to lead to bankcrupcy.
In the real world, a complex situation impact on the capital structure in the company. Managers have to consider the debt to equity ratio to maxize shareholder wealth, and equal the level of WACC. The taxation is very important index for managers making a decision. They have to concerning the effect of taxation to estimate the percentage of the WACC.
Wall Street reported a news that "Schaeffler cuts stake in Continental to reduce debt" on this Monday. What things caused this huge debt existing? Schaeffler cost 12 billion euros to acquisition its larger viral Continental on August 2008.
What reason causes larger company Continental have to bid with Schaeffler? Because of the Lehman Brothers collapse, the wake of stock market impact on the Continental forced bid with Schaeffler. According to primer CEO of Continental, Manfred Wennemer expressed that he had tired to preserve the independence of the company. So it led to Continental accept bid with Schaeffler on August 2008. Karl-Thomas Neumann instead of Wennemer was a new CEO of Continental on September 2008.
Schaeffler have to delay taking a majority stake until 2012 when they faced those huge debts. In fact, Schaeffler announced that they plan to reduce 15 per cent total stake of Continental to 1.8 billion euros from 12 billion euros recently which caused the share price of Continental up 2.9 per cent. However, they still have nearly 6 billion euros debt from their operation, even cut the cost of acquision to 4.6 billion euros.
Schaeffler launched a takeover bid for Continental in order to maxmize the value of their shareholders. However, increasing huge debt was further burdened by Schaeffler acqusition. It does not bring benefits, but also taking financial risk for company. It will also affect the attractive investment capability and even worse to lead to bankcrupcy.
In the real world, a complex situation impact on the capital structure in the company. Managers have to consider the debt to equity ratio to maxize shareholder wealth, and equal the level of WACC. The taxation is very important index for managers making a decision. They have to concerning the effect of taxation to estimate the percentage of the WACC.
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