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Page 1: Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All.

Mark Grinblatt Sheridan TitmanFinancial Markets and Corporate Strategy, 2/e

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Part IV

Capital Structure

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Chapter 15

How Taxes Affect Dividends and Share Repurchases

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Exhibit 15.1: Dividend and Repurchase Payout Ratios

Source: Gustovo Grullon and roni Michaely, 2000. “Dividends, Share Repurchases and the Substitution Hypothesis” Rice University working paper.

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Exhibit 15.2: Selected Dividend Yields and Payout Ratios, 1993 and 1999

Note: These ratios were calculated with data taken from COMPUSTAT.

AT&TApple ComputerBoeingDeereDisneyDow ChemicalGeneral MotorsHewlett-PackardMcDonaldsMicrosoftMinnesota Mining & Mfg.Philip MorrisSafeway TexacoWal-Mart

Company

1993 1999

Dividend Yield(%)

Payout Ratio(%)

Dividend Yield(%)

Payout Ratio(%)

2.51%1.642.312.700.544.581.461.140.7403.054.6704.940.52

44.92% 64.39 27.34 92.74 18.35110.82 23.36 19.32 13.82 0 56.45 63.91 0 65.84 12.81

1.73%01.352.430.202.602.750.860.4802.298.0003.310.37

49.72%022.2285.448.2557.8122.9920.7813.54051.0357.32084.1116.00

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Exhibit 15.3: Chrysler’s Choice: Dividends or Share Repurchase

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Exhibit 15.4: Tax Consequences: Dividend versus Share Repurchase (in $ millions)

Dividend AlternativeDividendTax rateImmediate tax liability

Share Repurchase AlternativeProceeds from sale of 2 million sharesLess original cost (at $38/share)Taxable capital gainTax rateImmediate tax liability

$100.0x 35%$ 35.0

$100.0- 76.0$ 24.0x 20%$ 4.8

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Exhibit 15.5: After-Tax Cash Flows for a Taxable Investor

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Exhibit 15.6: Cash Flows for a Tax Exempt Investor


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