4.3 Dividends

Question 1

Dividend (rules)

Growth effect

Answer 1

• cannot be paid out of APIC
• must have Retained Earnings to pay dividends
• High growth rate = low dividends usually due to using cash for growth
• Can be limited by debt covenants

Question 2

Residual Theory of Dividends

Answer 2

• Amt paid as dividends depends on available investment opportunities and debt-equity ratio where cost of capital is minimized. Rational investor should prefer reinvestment but if Company has no better places to invest > Dividend

Question 3

Date of Declaration (Dividend)

Answer 3

Date directors vote for Dividend (Dividend becomes a Liability)

Question 4

Date if Distribution (Dividend)

Answer 4

Date Dividend is Paid

Question 5

Ex-Dividend Date

Answer 5

• Stock exchanges determine (2 Days prior to Declaration) to process transactions so shareholders who get dividend

Question 6

Date of Record

Answer 6

Date directors determine who will get dividend (After declaration)

Question 7

Stock Dividend

Answer 7

Increases APIC> Reduces Retained Earnings

Question 8

Stock Split

Answer 8

No accounting entries. Just splits stock

Question 9

Share Repurchases (Reasons)

Answer 9

• Mergers
• to make sure enough on hand for Share Options/stock dividends
• Increase EPS
• Prevent Hostile Takeover
• Eliminate a particular owner

Question 10

Factors affecting Dividend Policy

Answer 10

LSCT, RRR

Legal Restrictions: can’t be paid of APIC. Must have Retained Earnings

Stability of Earnings: company whose earnings fluctuate will have smaller dividends.

Cash Position: need cash to pay.

Tax Position of Shareholders: may not want Dividends due to high bracket. Instead want Capital gains.
But, Accumulated Earnings Tax on too much retained earning

Rate of Growth: fast growing will need to finance with Retained Earnings. Will have LOW payout ratio

Restrictions in debt agreements (Restrictive covenants in Indenture limit dividends)
s.

Residual Theory of Dividends: Amt paid as dividends depends on investment opportunities and debt to equity where COC minimized. Rational investor prefers reinvestment.

Question 11

Advantages of Stock Splits/Dividends

Answer 11

More share outstanding = lower price per share

Publicity gesture only to give S/H impression they are receiving something.

More shares O/S = larger number of shareholders. Usually good customers of PRODUCTS

Inducing more small buyers and maybe stock price increase.