Corp 4 Flashcards
What are the main ways corporations pay out cash to shareholders?
Dividends (cash or stock) and share repurchases.
What is a cash dividend?
A payment of cash by the firm to its shareholders.
What is the ex-dividend date?
The date that determines whether a stockholder is entitled to a dividend payment.
What is the record date?
The date on which shareholders must be on the company’s books to receive a dividend.
What is a stock dividend?
The distribution of additional shares to a firm’s existing shareholders.
What is a stock split?
Issuing additional shares to shareholders, similar in effect to a stock dividend.
What effect do stock dividends and splits have on firm value?
They do not change firm value; share price adjusts downward as share count increases.
Example: What happens to share count after a 50% stock dividend on 2 million shares?
It increases to 3 million shares.
Example: If total firm value is $30m and shares rise from 2m to 3m, what is the new share price?
$10 per share.
What is the information content of dividends?
Dividend increases signal managerial confidence; dividend cuts often signal trouble.
What are the main methods of stock repurchase?
Open-market, tender offer, Dutch auction, and direct negotiation (greenmail).
What is a tender offer?
A company offers to repurchase shares at a fixed price; shareholders choose whether to sell.
What is a Dutch auction?
Shareholders state the prices they are willing to accept; the company repurchases at the lowest price that fills the desired quantity.
What is greenmail?
The company buys back shares from a specific investor, often to prevent a takeover.
Do dividends affect total shareholder wealth?
Not in perfect markets—wealth is the same whether through price drop + dividend or retained value.
Why are managers reluctant to cut dividends?
Cuts send negative signals; they prefer smoothing dividends based on sustainable earnings.
What are some factors influencing dividend decisions?
Target payout ratios, repurchase policies, and the informational value of payouts.
Why is dividend policy considered irrelevant under M&M theory?
Because investors can create their own payout by selling shares, and firm value is driven by investment policy, not payout.
What is the agency cost of free cash flow?
When firms have excess cash and few investment opportunities, managers may waste funds unless forced to pay out.
How can dividends reduce firm value?
If dividends are taxed more heavily than capital gains, they reduce after-tax returns for investors.
Why might high payout stocks be valued more by certain investors?
Some investors (clienteles) prefer income stocks, which can drive up demand and prices.
How does payout policy change with a firm’s life cycle?
Young firms reinvest more; mature firms increase payouts as growth slows and cash flow rises.
What is the tax disadvantage of dividends?
Dividends may be taxed more heavily than capital gains, reducing the attractiveness of high-payout policies.
What is a residual payout policy?
Firms pay dividends from leftover cash after investment and financing needs are met.
Why might a firm prefer share repurchases over dividends?
Repurchases offer more flexibility and tax efficiency, and they can signal undervaluation.
What happens to share price after a dividend or repurchase?
Price typically drops by the dividend amount or adjusts due to decreased share count.
What is dividend smoothing?
A practice where firms adjust dividends gradually to avoid frequent changes, especially cuts.
Why might investors not worry about reinvestment by young firms?
Young firms typically have good investment opportunities and aligned management incentives.
