RicherFin Education

Corporate Finance

Payout Policy

Payout policy allocates cash between reinvestment, debt reduction, liquidity reserves, dividends and share repurchases. The decision depends on investment opportunities and financing resilience.

The decision examined

Accounting profit does not determine distributable cash. A stable policy must account for maintenance investment, working capital, debt service, covenants and the funding required by valuable projects.

Learning outcomes

  • Construct cash available for payout.
  • Compare dividends and repurchases.
  • Test payout sustainability under stress.

Key concepts

  • Distributable cash
  • Dividend
  • Share repurchase
  • Payout ratio
  • Reinvestment
  • Sustainability

Course structure

  1. Reinvest or distribute
  2. Cash capacity
  3. Dividends
  4. Repurchases
  5. Signalling
  6. Sustainable growth

Analytical framework

Start from available cash

An operating measure of distributable cash deducts priority uses before discretionary distributions:

Cash available before payout

FCFpayout = CFO − Maintenance capex − Net debt service − Liquidity reserve

Maintenance capex and the liquidity reserve require explicit, stable definitions. Otherwise the apparent payout capacity changes with management's classification choices.

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