Equity Part 3

Quick reference

• 00:04 Continuing our work on equity.
• 00:06 We've now calculated the ordinary equity issuance and buybacks.
• 00:11 The last thing we've got to do on the cash flow statement, then, is dividends paid.
• 00:16 Half the equity done, half the equity to go.
• 00:19 So let's go back to our calculations, and calculate the dividends.
• 00:23 Now, I just want to explain that sometimes financial modeling and
• 00:28 reality part company.
• 00:29 And here's a very good example of when it does.
• 00:32 The dividend payout ratio.
• 00:33 Well, we take a proportion of the net profit after tax before the period.
• 00:37 Great way of doing it in financial modeling,
• 00:40 horrendous way to do it in reality.
• 00:43 Shareholders like to have a nice constant growth in their dividends.
• 00:47 To take last year's dividend, and grow it by a small percentage.
• 00:50 However, you much you try and
• 00:51 smooth with an income statement, it tends to have some level of volatility in it.
• 00:55 If you're actually taking a percentage, and
• 00:57 I'm not even taking a constant percentage, I'm moving it between 25% and 45% here,
• 01:01 it's gonna be all over the place the dividends.
• 01:03 And that can be value destroying for shared price.
• 01:06 So just watch out in reality, this isn't evaluations training course, but
• 01:09 it is something to be aware of that this is pretty simplistic.
• 01:14 Now, first thing we gotta do before we do our dividend pay ration is calculate
• 01:18 the maximum dividend payable using that nice wonderful maximum,
• 01:21 maximum formula we derived a few moments ago.
• 01:23 So the first thing we need to do is bring in the retained profits.
• 01:27 We've got those in the balance sheet, that's the o in retained profits.
• 01:31 So that's got equals.
• 01:32 Let's go to our balance sheet, retain profits are here in row 47,
• 01:38 copy that across.
• 01:41 Net profit after tax, we'll find in our income statement.
• 01:46 So let's just scroll down, there it is there, copy that across.
• 01:51 And the cash flow available for dividends.
• 01:53 Now, point of controversy here, the cash flow available for
• 01:57 dividends is all the cash we've got in the bank.
• 02:00 There's no law saying you can't do that,
• 02:02 you know you can pay out what have you got in the bank and businesses frequently do.
• 02:05 But in modelling what they tend to do is they tend to take the cash that's
• 02:09 actually originated in the year, it's almost like in the cruise basis of cash.
• 02:13 Now, there's no rationale really other than to see whether or not your up or
• 02:17 down and not paying basically dividends out of previous period's cash flow.
• 02:22 But why can't you do that?
• 02:24 Of course you can.
• 02:24 You have good periods, you have bad periods.
• 02:27 But I'm going to do with what people do in reality which is just take the cash flow
• 02:31 for the current period.
• 02:32 Now, we have to be careful about the cash from the current period
• 02:35 cuz we mustn't include the dividends paid, or we'll end with a circular.
• 02:38 So we're gonna go equals, go to the cash flow statement, we're going to take
• 02:43 all of our net operating cash flow and we can take all or our investing cash flow.
• 02:49 Plus, not all of the financing, we've got to take the sum of everything but
• 02:55 the dividends paid, so its rows 30 to 33 don't include row 34 ,the dividend paid,
• 03:00 or you're going to have some heartache, copy that across.
• 03:05 Now, we can calculate our maximum dividend payable.
• 03:08 That is going to be that =max(min(max of the net profit after tax and
• 03:15 retained earnings, the retained earnings plus net profit after tax, comma, and
• 03:20 net profit after tax), and it's the minimum of that, and the cash available.
• 03:25 And it's the maximum of all of that and 0, so
• 03:27 we don't end up asking the shareholders for money.
• 03:30 Copy that across, and that's what we can pay out.
• 03:33 Now, the dividend paid on the ratio is going to be
• 03:37 equal to the ratio multiplied by the net profit after tax.
• 03:42 But, what if the net profit after tax is less than 0?
• 03:45 We need to put a MAX in front of this, and actually restrict it to 0,
• 03:49 so if it's negative, we're not asking the shareholders for money.
• 03:55 Therefore, the dividend actually declared is going to be the minimum of these two
• 03:59 amounts.
• 04:01 So it's gonna be the minimum and the maximum dividend to payable.
• 04:03 And the dividend based on the ratio.
• 04:07 We don't need to check if it's greater than 0 because we've checked both of these
• 04:11 are greater than 0.
• 04:13 So that's it, we're done.
• 04:14 That's our dividend we can declare.
• 04:17 Now, we've got to do our control account.
• 04:19 Well, I've already brought in the closing dividend payable from the opening
• 04:22 balance sheet.
• 04:23 So to calculate the opening dividend payable is just
• 04:26 equal to the previous period's closing balance as before.
• 04:30 The closing dividend payable is just Alt equals the sum of those here, Ctrl+C.
• 04:36 Paste specialist formulas in the usual way.
• 04:38 ESF, Enter.
• 04:40 The dividend declared is simply going to be called what we just calculated.
• 04:44 And we're going to assume a one period delay.
• 04:49 Dividends are assumed to be paid in the period after they are declared.
• 04:52 So it's equals minus the opening balance to finish off with, lovely.
• 04:59 We've got four lines in our controller count, that means three calculations.
• 05:02 The first one dividend declared goes into the balance sheet.
• 05:05 Hang on, should not be movement in dividend declared.
• 05:08 Actually, no it shouldn't.
• 05:09 If you look at the balance sheet we did dividends
• 05:12 declared as part of a little running total control account.
• 05:15 So we could actually put the dividend declared number the movement in for
• 05:20 the period, it's fine, great.
• 05:23 That's why we should link that way.
• 05:25 Dividend pay that goes into the cashflow statement to finish that off or
• 05:28 closing dividend payable will get the balance sheet to balance.
• 05:31 So let's do it.
• 05:32 It's getting exciting.
• 05:34 So in here copy this down so that we get to the working progress, just for
• 05:37 the formatting.
• 05:38 Equals minus back to the calculations here.
• 05:42 Dividend declared, copy that across.
• 05:45 We can now get rid of the W in workign progress here,
• 05:49 cuz that's done and it doesn't balance, but that's okay.
• 05:51 We go to the cash flow statement, and put through the dividend paid.
• 05:56 Goes there.
• 05:59 And finally, to write the balance sheet balance, we go back to the balance sheet
• 06:02 and we go up here to dividends payable equals, back to our calculations.
• 06:08 Put in the running total number here, copy that across, and
• 06:11 when we do, the balance sheet balances.
• 06:14 We've done return of equity, we've done return on equity, we've done equity.
• 06:19 Let's move on.

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