Corporate Finance Flashcards
Calculating Dividend/Share using Adjustment Factor Over Time
Expected Dividend = Previous Dividend + (Expected Earnings * Target Payout Ratio - Previous Dividend) * Adjustment Factor
adjustment factor = 1/years to reach target
Stable Dividend Policy
Maintaining the same $ amount of dividends over time
Principle-Principle Problem
When strong shareholders with concentrated voting power use their influence and power over the board of directors to monitor and appoint managers
Principle-Agent Problem
Managers use company resources to pursue their own interests over the shareholders
Purpose of ESG analysis on bonds
Mitigate downside risk
Purpose of ESG analysis on equities
Mitigate downside risk and identify potential opportunities
Proprietary Methods of identifying ESG factors
Analysis use their own judgement based on information available from corporate reports, industry organizations, news reports and environmental groups
If short-term rates are higher than long-term, will long-term ERP be biased upward or downward
upward
Grinold-Kroner Model
Long-term inflation forecast + long-term growth in GDP + growth in market P/E + dividend yield - long-term risk-free rate
which taxation system would result in the highest effective tax rate on the final dividend to the shareholder
double taxation
dividend imputation taxation system
removes the corporate tax rate, thereby always reducing effective tax than double taxation regardless of the level of the shareholder tax rate
FCFE Coverage Ratio
FCFE / (Dividends + Share Repurchases)
3 Classifications for Liquidating Dividend
1) Going out of business and selling assets
2) Selling portion of business and distributing proceeds
3) Pay dividend that exceeds accumulated retained earnings
Backfill bias
Inconsistent reporting can inflate performance
dividend yield after stock split
the same
impact of share buyback on option pricing
no impact
ceo duality
CEO also being the chair of the board
Which dividend policy argument accounts for and depends on imperfect capital markets
Tax argument
split rate taxation system
corporate earnings that are distributed as dividends are taxed at a lower rate at the corporate level than earnings that are retained
Impact of cash dividends on interest coverage ratios
no impact
Jenson’s free cash flow hypothesis
To mitigate agency issues between managers and shareholders, a company should pay out all FCFE as dividends
What do dividends convey about future earnings growth
future earnings growth can be expected to increase
