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Intel Case Study

3226 words - 13 pages

ESPEL Pierre
MATHIEU Jean-Charles
PIQUEMAL Brice

Investment analysis & Financing Decisions

Intel Corporation, 1992

A. Guembel

What factors in general do you think should determine a firm’s payout policy? Explain briefly for each factor how and why you think it should affect payout policy?

- Payout Policy

Net income has only two possible assignments: either reinvestment in the company in the form of cash flow or distribution to shareholders in the form of dividends or share repurchases. What are the factors that determine the dividend policy of a company?

- Basic principle : self-financing.

It is a financial principle that a company must ensure its development ...view middle of the document...

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However, when dividends are taxed at a higher rate than capital gains rates, they believe it is better for the company to buy back its shares instead of distribute dividends. Regarding the share repurchase, the most frequently acquired shares are canceled, within 10% of the capital every 24 months . The redemption price shall first on the nominal value of shares redeemed, thus reducing the excess distributable reserves.
On markets in equilibrium, the distribution has no impact on the property of the shareholder, so it can not be good or bad distribution policies. We find the approach of Modigliani - Miller financial policy : there is no sustainable way to create value through a simple financial decision.

- Signalling theory and asymmetric information:

A signal model is a model in which the company uses dividends, investment or debt to reveal to the market its " health ." Each "signal" is associated with a cost, the cost of the signal which penalizes the company when transmitting false information to the market. The distribution is a means of communication between the company and investors.
Leaders are naturally motivated to give the best possible image of the company, they distinguish themselves from other through payout policies that bad companies can not imitate.
The distribution of dividends or share repurchases is one of these policies because a company which is going through difficulties, issues will not be able to do the same because of a lack of liquidity. Dividend policy or share repurchase is used by managers to convince that their image corresponds to the reality. Moreover, annual dividends are distributed generally 4-6 months after the end of the period so the dividend level depends on both the closed result and the next one. The level of distribution give an information on the forecast result of the year.
The dividend reduction may indicate a need of cash due to new investment opportunities, contrary to a dividend increase can be interpreted as a scarcity of investment opportunities. Communication strategy on the dividend policy is crucial, especially if this policy is changing .

- Agency theory :

According to the agency theory, creditors and managers have a common interest in defending the self-financing because the money stays in the company. The self-financing is a source of funding that requires getting little communication and the cost of information asymmetry is reduced. If leaders realize investments with low profitability, they are exposed to Public takeover bid or OPE. Forcing managers to pay dividends to shareholders, it is a way to discipline them and to emphasize the rule of the shareholder.
The dividend is an instrument used by the market to control managers. Dividend represent a part of the liquidity that the compagny could have invest. If managers want to invest they will resort to debt which puts pressure on them, and push them to be more effective.

- Market conditions :

Although a dividend...

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