Chapter 17 - Payout policy Flashcards
What is payout policy
Payout policy is the way a firm choose to use its earnings.
Basically, a firm can either retain or payout the earnings.
If retained, it can be reinvested or held.
if payed out, it can be used to pay dividends or repurchase shares.
Who determine dividends?
Board of directors. They set the amount per share, and set the date.
What is the declaration date?
Declaration date is the date when the firm determine how much dividend and when. After this, the dividend is an obligation.
What is the record date?
The record date is the date that registers all the shareholders, so that the firm can determine who gets dividend and who doesnt.
what is the ex-dividend date?
ex-dividend date is the date that: Anyone who purchase share at this date or after, will not receive a dividend.
What is the payable date?
Dividend delivery
talk through the dividend process
Board of directors determine dividend. This is the declaration date. At this time, the dividend becomes an obligation to the firm.
Then there is the record date. The record date is used to count the shareholders who will receive the dividend. Because it takes two business days to be registered as a shareholder, the day before the record date is known as the ex-dividend date. In other words, you must purchase the shares before the ex-dividend date to receive the payment.
Name an alternative way to pay cash to investors
Stock repurchase.
Elaborate shortly on stock repurchases
The firm use cash to buy back shares of its own shares outstanding. These shares are then generally held in corporate treasury, and can be used to raise funds whenever needed.
What types of stock repurchases do we have?
We have 3.
1) Open market repurchase
2) Tender offer
3) Targeted repurchase
Elaborate on open market repurchase
the most common way to do it (95%). No obligations to do it.
Typically done over a period of time.
MUST be done in accordance with principles related to not manipulating the share price. For instance, daily trading rules etc. SEC has guidelines.
Must be announced etc.
Elaborate on the tender offer
A firm offers to buy a specific number of shares during a specific time. The purchase price is typically at a premium.
it depends on having enough people wanting to accept the tender offer.
If not enough tenders are included, the firm has no obligation.
Elaborate on targeted repurcahse of stcok
identify major shareholder. Negotiate directly.
It typically happens when a major shareholder wants to sell, but the market is not liquid enough for the sale. The seller can then accept a small discount and sell directly to the firm.
Recall the two options for givcing cash to sharehgolders
stock repurchase and dividend payout
Suppose a firm will pay a dividend. What can we say about the share price before ex-dividend date?
It will trade “cum-dividend”.
This basically means that the share price will trade at Pcum = Current Dividend + PV(future cash flows).
It is important to also understand that right after the dividend is payed, the stock is right back at PV(future cash flows)
