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CFA level 2 > Corporate Issuer > Flashcards

Corporate Issuer Flashcards

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1
Q

Name the 3 different types of Cash Dividend

A

Regular
Extra (Special)
Liquidating

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2
Q

Name the 3 different types of Non Cash Dividend

A

Stock Dividends (additional shares instead of cash)
Stock Splits
Reserve Stock split

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3
Q

What are three different Dividend Reinvestment Plans?

A

Open market: Company purchase shares in the open market

New-Issue DRP: New shares are issues to be delivered

Hybrid: Either or.

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4
Q

What is a Extra Dividend?

A

A dividend paid by a company that does not pay a dividend or on a regular schedule, and an additional dividend to a regular cash dividend

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5
Q

What is liquidating dividend?

A
  1. When a company goes out of business and the net assets are distributed to the shareholder.
  2. When a compnay sells a portion of its business in cash and proceeds are distributed to shareholders.
  3. Pays a dividend that exceeds its accumulated Retained Earnings
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6
Q

According to Tax effect theory

Tax div > Tax Capital gains

A

Investors prefer lower payout ratio or repurchase from a distribution

investors will pay more for lower payout ratio

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7
Q

According to Tax effect theory

Tax div < Tax Capital gains

A

Investors prefer cash dividend

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8
Q

According to Tax effect theory

Tax div = Tax Capital gains

A

Investors prefer lower payout ratio or repurchase from a distribution

investors will pay more for lower payout ratio

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9
Q

The two different types of Ownership structure

( Corporate Governane ESG)

A

Dispersed: Many shareholders, non have the ability to exercise control.

Concentrated: An individual shareholder, or group, can exercise control.

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10
Q

Ownership Strucutre: Dispersed Ownership, dispersed voting power

A

Weak shareholders, strong manager

Principle agent conflict can arise

Can be mitigated if controlling sharegolders are present

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11
Q

Ownership Strucutre: Concentrated Ownership, concentrated voting power

A

Strong shareholders weak managers

Strong shareholders: Can allocate compnay resources to their benefit and can monitor managment

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12
Q

Describe Jensen’s FCF Hypothesis

A

A higher dividend payout ratio constrains managment from overinvesting

If the company is highly leveraged, a high payout ratio may constrain avaliable cash leading to underinvestment

High payout ratio increases agency cost to creditors

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13
Q

What is the “bird in hand argument”?

A

Suggests that dividens today are less risky than capital gains tomorrow.

Under tax argument, even if tax rate is the same for dividends and capital gains. Investors would prefer capital gains since dividends would come with an annual tax payment.

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14
Q

Formula for shares bought back?

A

Q shares bought back / Share price

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15
Q

Formula for new BVPS ?

A

(Equity - value bought back) / (Previous shares Q - Q boughtback)

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16
Q

How will EPS chnage if

Kd(1-t) < E/P

A

EPS will increase

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17
Q

How will EPS chnage if

Kd(1-t) > E/P

E/P is inverted (P/E)

A

EPS will decrease

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18
Q

Formula for FCF coverage ratio

A

FCFE / (Div + Repurchase)

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19
Q

FCF Coverage ratio = 1

A

All cash returned to shareholders

20
Q

FCF Coverage ratio < 1

A

Improving liquidity ratio

21
Q

Dividend Coverage ratio

A

1 / Div Payout ratio

NI / Div

EPS / DPS

22
Q

What is stable dividend policy

A

Most common.

Dividends are based on long-term forecasts of sustaniable earnings

23
Q

Formula for Stable dividend Policy

A

E(increase in Div) = [E(earnings) x Target Div Payout ratio - Previous dividend] x 1/ time frame

E(increase in Div) = [E(earnings) x Target Div Payout ratio - EPS x DPR] x 1/ time frame

24
Q

Constant Div Payout Ratio

A

Dividend fluctuates with earnings

25
Q

Formula for Dividend payout ratio

A

Value of dividend paid out / Net income

DPS / EPS

26
Q

Cost of Capital Factors

A

Top-Down: External
Bottom-up: Company Specific

27
Q

How will Cost of Capital change if capital avaliability increases or decreases?

A

Increase: Lowers Cost of Capitl
Decreases: Increases Cost of Capital

Inverse relationship

28
Q

What will the Cost of Capital be if a company has revenue concertration?

A

Increases Cost of Capital

29
Q

Cost of capital security features
Debt: Calliable

A

Increases Cost of capital

30
Q

Cost of capital security features
Debt: putable

A

Decreases Cost of Capital

31
Q

Cost of capital security features
Debt: Convertable

A

Lowers Cost of Capital

32
Q

Cost of capital security features
Equity: Prefered

A

Lowers cost of capital

33
Q

Cost of capital security features
Equity: Common

A

Increases Cost of Capital

34
Q

Formula for enterprise value

A

MV of Eqity + MV of Debt - Cash

35
Q

Factors that make up the Cost of debt Kd = rd

A

Risk free rate + Creidt Spread

36
Q

Factors that make up the Cost of equity Ke = re

A

Equity Risk Premium + Idiosyncrated Risk Premium

Market risk + Company Spicific risk

37
Q

Cost of Capital Factor: Top Down

A

Capital Avaliability
Market Conditions
Legal and regulatory consideration
Tax Jurisdiction

38
Q

Cost of Capital Factor: Bottom up

A

Revenue, earnings, cash flow volatility
Asset nature and liquidity
Financial strength and profitability
Security features

39
Q

What is a “spin-off”

A

A distinct part of the business is seperated to form a new independent company.

No cash for parent company.

Shareholders will receive proportional number of shares of the new company.

40
Q

What is a “Split-off”

A

Some of the partent company shareholders are given shares in a newly created entity in exchange for their shares of the parent compnay

41
Q

What is What is “Comparable Company analysis”

A

Use the valuation multiple of similar listed companies to value the target company.

needs a set of comparable companies - Similar industry with similar financial characteristics.

Only arrives at a fair stock price, not a takeover price.

42
Q

What is needed to estimate a fair takeover price of a company?

A

Estimate a fair takeover premium and use the information to adjust the stock price.

43
Q

What is What is “Comparable Transaction analysis”

A

Use a valuation multiple from historical acquisition of similar targets.

Multiple would already include takeover premium.

44
Q

If an acquirer wanted to shift the risk of realizing synergies onto the target’s shareholders, the aqcuirer would make a …

A

Stock offer.

The more confident the managers are at the estimated synergies will be realized, the more the aqcuiring managers will prefer to pay with cash and the target managers will prefer to receive stock.

The more the managers is paid for with the acquirer’s stock, the more that the risk and benefits of realizing synergies will be passed on to the target shareholders.

45
Q

What is Tax imputation system

A

Pre tax earnings are taxed at shareholder marginal tax rate

CFA level 2 (10 decks)

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