Read Parts 1 and 2 of the article Morgan Stanley Round table on Capital Structure and...

Read Parts 1 and 2 of the article Morgan Stanley Round table on Capital Structure and Payout Policy and provide a summary of the salient points made by the panelists on the optimal capital structure and the payout policy of the firm

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Expert Solution

The agenda of the panel discussion:

If there is an optimal, or value‐maximizing, capital structure for a given company?
If there is an optimal dividend payout policy?
Whether shareholders prefer stock repurchases rather than dividends?

Salient Points:

The business strategy, its business plan should pave the way for the financing decision and the cash flow distribution policy.
The capital structure and dividend policy is governed by the stage and maturity of the company.
Growth companies require capital for growth and expansion. They have many investment opportunities where they can earn positive NPV. In such cases, the firm should
- Preserve financial flexibility to carry out the business plan,
- Have higher reliance on equity financing
- Preserve capital and hence engage in limited payouts.
Mature companies have limited positive NPV investment opportunities. They should
- resort to more aggressive use of debt
- Have higher payouts in terms of dividends or buybacks because they don't have that many positive NPV investment opportunities. So, it's better to return the surplus cash to the shareholders.
The firm's excess cash must not be wasted on projects that produce growth at the expense of profitability.
Given a choice between dividends and stock repurchases:
- dividends appear to be a better way to distribute the surplus cash to the shareholders than open market repurchase programs.
Between the debt‐equity decision, there is indeed an optimal level of financial flexibility
- too little funding may lead to lost investment opportunities
- too much of capital may lead to over investment.

jeff jeffy answered 3 weeks ago

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