CF chapter 17 Flashcards
Payout Policy
The way a firm chooses between the alternative
ways to distribute free cash flow to equity holders
Special dividend
One time dividend payment a firm makes, usually larger than a typical dividend
Stock dividend
Instead of cash, shareholders get more shares
Open market repurchase
– When a firm repurchases shares by buying shares in the open market
– Open market share repurchases represent about
95% of all repurchase transactions.
Greenmail
When a firm avoids a threat of takeover or a change of management by major shareholder by buying out the shareholder, often at a higher than market price
Price of share formula
Value of the firm / number of shares
Cum-Dividend price Pcum Formula
Pcum = Current dividend + PV(future dividends)
Ex dividend price formula Pex
Pex = PV (Future dividends)
in a perfect market) on the ex-dividend date the
share price drops by the dividend amount
Pcum - Pex =
Div * (1-Td)
We can define an effective dividend tax rate T*d
((Td - Tg )/ 1 - Tg)
Tg is the capital gains rate tax, and Td is the dividend tax rate.
Taxes and Cash Retention
In the presence of taxes, cash retention
and firm-level investment creates
corporate taxable income.
Dividend Smoothing
The practice of maintaining relatively constant dividends
Dividend Signaling Hypothesis
The idea that dividend changes reflect
managers’ views about a firm’s future earning
prospects
If firms smooth dividends, the firm’s dividend choice
will contain information regarding management’s
expectations of future earnings.
When a firm increases its dividend, it sends
a positive signal to investors that
management expects to be able to afford
the higher dividend for the foreseeable
future.
When a firm decreases its dividend, it may
signal that management has given up hope
that earnings will rebound in the near term
and so need to reduce the dividend to save
cash.
