(38) Dividends and Share Repurchases - Basics Flashcards
LOS 38. a: Describe regular cash dividends, extra dividends, liquidating dividends, stock dividends, stock splits, and reverse stock splits, including their expected effect on shareholder’s wealth and a company’s financial ratios.
Cash dividends are a payment form a company to a shareholder that reduces both the value of the company’s assets and the market value of equity. They can come in the form of regular, special, or liquidating dividends.
LOS 38. a: Describe regular cash dividends, extra dividends, liquidating dividends, stock dividends, stock splits, and reverse stock splits, including their expected effect on shareholder’s wealth and a company’s financial ratios.
Stock dividends are distributions of new share rather than cash. Stock splits divide each existing share into multiple shares. Both create more shares, but there is a proportionate drop in the price per share, so there is no effect on the total value of each shareholder’s shares.
LOS 38. a: Describe regular cash dividends, extra dividends, liquidating dividends, stock dividends, stock splits, and reverse stock splits, including their expected effect on shareholder’s wealth and a company’s financial ratios. What are the effects of cash dividends, stock dividends, and stock splits on liquidity or leverage ratios?
Other things equal, paying a cash dividend decreases liquidity ratios and increases leverage ratios. Stock dividends and stock splits do not affect liquidity or leverage ratios.
6LOS 38. a: Describe regular cash dividends, extra dividends, liquidating dividends, stock dividends, stock splits, and reverse stock splits, including their expected effect on shareholder’s wealth and a company’s financial ratios. Describe where the impact would be seen on a 20% stock Dividend on shares.
LOS 38. a: Describe regular cash dividends, extra dividends, liquidating dividends, stock dividends, stock splits, and reverse stock splits, including their expected effect on shareholder’s wealth and a company’s financial ratios. Describe where the impact would be seen on a 3-for-2 Stock Split on Shareholders.
LOS 38. b: Describe dividend payment chronology, including the significance of declaration, holder-of-record, ex-dividend, and payment dates.
The chronology of a dividend payout is:
- Declaration date
- Ex-dividend date
- Holder-of-record date
- Payment date
LOS 38. b: Describe dividend payment chronology, including the significance of declaration, holder-of-record, ex-dividend, and payment dates. What is important to note about the ex-dividend date?
Stocks purchased on or after the ex-dividend date will not receive the dividend. The ex-dividend date is two business days prior to the holder-of-record date.
LOS 38. c: Compare share repurchase methods.
Companies can repurchase shares of their own stock by buying shares in the open market, buying back a fixed number of shares at a fixed price through a tender offer, or directly negotiating to buy a large block of shares from a large shareholder.
LOS 38. c: Compare share repurchase methods. Define Dutch auction method.
Dutch auctions begin with the company communicating to shareholders a specific number of shares and a range of acceptable prices.
LOS 38. c: Compare share repurchase methods. Define when companies repurchase share in the open market.
When companies repurchase shares in the open market, they buy at market prices and in quantities as conditions warrant.
LOS 38. c: Compare share repurchase methods. Define a fixed price tender offer.
In a fixed price tender offer, the company announces a fixed number of shares to be repurchased and a fixed price.
LOS 38. d: Calculate and compare the effect of share repurchase on earnings per share when 1) the repurchase is financed with the company’s excess cash, and 2) the company uses debt to finance the repurchase.
The effect of share repurchases using borrowed funds on EPS is:
- If the company’s E/P is equal to the after-tax cost of borrowing, there will be no effect on EPS.
- If the company’s E/P is greater than the after-tax cost of borrowing, EPS will increase.
- If the company’s E/P is less than the after-tax cost of borrowing, EPS will decrease.
LOS 38. d: Calculate and compare the effect of share repurchase on earnings per share when 1) the repurchase is financed with the company’s excess cash, and 2) the company uses debt to finance the repurchase. Explain why when share repurchase when after-tax cost of debt is less than earnings yield, the EPS after buyback will increase.
LOS 38. d: Calculate and compare the effect of share repurchase on earnings per share when 1) the repurchase is financed with the company’s excess cash, and 2) the company uses debt to finance the repurchase. Explain why when share repurchase when after-tax cost of debt is greater than earnings yield, the EPS after buyback will decrease.
LOS 38. e: Calculate the effect of share repurchase on book value per share.
The effect of a share repurchase on book value per share is:
- An increase, if the share price is less than the original BVPS.
- An decrease, if the share price is greater than the original BVPS.
LOS 38. e: Calculate the effect of share repurchase on book value per share. Explain mathematically the effect of a share repurchase on a book value per share if the share price is less than the original BVPS, and if the share price is greater than the original BVPS.
LOS 38. f: Explain why a cash dividend and a share repurchase of the same amount are equivalent in terms of the effect on shareholders’ wealth, all else being equal. Explain mathematically.
