Chapter 16 Flashcards
Changes in cash dividends must be offset by?
issues or retirements of shares
Why is analyzing dividends important?
It conveys information about the firm’s profitability to investors. It is taxed at a higher rates than capital gains. Investors worry that cash-cow corporations will run out of positive NPV investments and waste cash on perks or poor projects.
How can corporations pay out cash to shareholders?
Paying dividends or repurchase some outstanding shares.
How do companies repurchase stock?
Buy in open market, tender offer to shareholder, Dutch auction, and direct negotiation with major shareholder
When will company buy back stock?
When they have accumulated a large amount of unwanted cash or wish to change their capital structure by replacing equity with debt.
Why would companies rather repurchase stock than raising dividend?
Raising dividend will incur a commitment to maintain the payout. Repurchases are much more volatile than dividends and is not a long term commitment to distribute more cash.
How to convince investors about a firm’s reported earnings?
Backing up with an appropriate dividend policy.
How would investors interpret dividends?
A higher dividend prompts a rise in the stock price, whereas a dividend cut results in a fall in price. Investors are more worried about the CHANGE in dividend rather than the level of dividend.
When does a company repurchase shares?
When they have accumulated excess cash or when they want to substitute debt for equity.
What is the MM proof?
Dividend policy is irrelevant in a world without taxes, transaction costs, or other market imperfections.
How does MM work in the case of issuing more shares by giving dividends?
Company transfer the value gained by new shareholders to payout dividends to old shareholders. Old shareholders suffer a capital loss equivalent to the dividend paid to them.
What is the firm’s equity?
Equity equals the market value of the firm’s outstanding shares (price per share times number of shares outstanding). It is not necessarily equal to their book value.
How to calculate share price of a company and the number of shares issued, when it completes a new project, while financing a dividend with the new shares?
First calculate the company NPV after dividend issuing, this would be (value of company - value of new shares), knowing this and number of shares outstanding will yield the new share price. Number of shares issued will equal the dividend issue/new share price.
Why does repurchasing favor stock holders who hold on to the stock?
In effect they are using their share to buy out their fellow shareholders and own a larger portion of the firm.
Company value is ______ by the decision to repurchase stock rather than to pay a cash dividend.
unaffected
