Assessing Dividend Policy: How Much Cash is Too Much?, Slides of Fundamentals of E-Commerce

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ASSESSING DIVIDEND POLICY:

OR HOW MUCH CASH IS TOO

MUCH?

It is my cash and I want it now…

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The Big Picture…

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I. The Cash/Trust Assessment

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Step 1: How much did the the company actually pay out during the period in quesRon? Step 2: How much could the company have paid out during the period under quesRon? Step 3: How much do I trust the management of this company with excess cash? ¤ How well did they make investments during the period in quesRon? ¤ How well has my stock performed during the period in quesRon?

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How much has the company returned to

stockholders?

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¨ As firms increasing use stock buybacks, we have to measure cash returned to stockholders as not only dividends but also buybacks. ¨ For instance, for the four companies we are analyzing the cash returned looked as follows.

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Disney’s FCFE

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Comparing Payout RaRos to Cash Returned

RaRos.. Disney

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An Example: FCFE CalculaRon

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¨ Consider the following inputs for Microso_ in 1996. In 1996, Microso_’s FCFE was: ¤ Net Income = $2,176 Million ¤ Capital Expenditures = $494 Million ¤ DepreciaRon = $ 480 Million ¤ Change in Non-­‐Cash Working Capital = $ 35 Million ¤ Debt RaRo(DR) = 0% FCFE = Net Income -­‐ (Cap ex -­‐ Depr) (1-­‐DR) -­‐ Chg WC (1-­‐DR) = $ 2,176 -­‐ (494 -­‐ 480) (1-­‐0) -­‐ $ 35 (1-­‐0) = $ 2,127 Million