Chapter 8 - Dividends Flashcards
1
Q
Factors to consider when paying dividend
A
- What do shareholders want?
- turbulent share price - clientele effect
- How will market perceive?
- signal to market
- Is cash available?
- Tax implications
- Policy of competitors
- Financing conditions e.g. covenants
2
Q
Dividend Policies
A
- Growth year on year
- Constant % of profit
- Zero dividend - all reinvested
- Residual theory - after all value enhancing projects
- Irrelevancy theory - only matters wealth over time
3
Q
Advantages of share buyback
A
- Doesn’t lead to future divi expectations
- Alters capital structure (debt/equity mix)
- lower cost of capital
- Maybe tax benefits
- Defense against hostile takeover - less shares in market
- Less shares means higher EPS and share price
4
Q
Disadvantages of share buyback
(as opposed to paying divi)
A
- Increased divi seen as stronger expression of confidence
- Increased divi leads to higher share price
- Small investors not approached
- Negative signal if management participate
- Increases debt exposure
5
Q
Scrip dividend
A
- offered free shares instead of cash
- Reduces R.E., increases S.C.