Corporate Issuer Flashcards
Name the 3 different types of Cash Dividend
Regular
Extra (Special)
Liquidating
Name the 3 different types of Non Cash Dividend
Stock Dividends (additional shares instead of cash)
Stock Splits
Reserve Stock split
What are three different Dividend Reinvestment Plans?
Open market: Company purchase shares in the open market
New-Issue DRP: New shares are issues to be delivered
Hybrid: Either or.
What is a Extra Dividend?
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
What is liquidating dividend?
- When a company goes out of business and the net assets are distributed to the shareholder.
- When a compnay sells a portion of its business in cash and proceeds are distributed to shareholders.
- Pays a dividend that exceeds its accumulated Retained Earnings
According to Tax effect theory
Tax div > Tax Capital gains
Investors prefer lower payout ratio or repurchase from a distribution
investors will pay more for lower payout ratio
According to Tax effect theory
Tax div < Tax Capital gains
Investors prefer cash dividend
According to Tax effect theory
Tax div = Tax Capital gains
Investors prefer lower payout ratio or repurchase from a distribution
investors will pay more for lower payout ratio
The two different types of Ownership structure
( Corporate Governane ESG)
Dispersed: Many shareholders, non have the ability to exercise control.
Concentrated: An individual shareholder, or group, can exercise control.
Ownership Strucutre: Dispersed Ownership, dispersed voting power
Weak shareholders, strong manager
Principle agent conflict can arise
Can be mitigated if controlling sharegolders are present
Ownership Strucutre: Concentrated Ownership, concentrated voting power
Strong shareholders weak managers
Strong shareholders: Can allocate compnay resources to their benefit and can monitor managment
Describe Jensen’s FCF Hypothesis
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
What is the “bird in hand argument”?
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.
Formula for shares bought back?
Q shares bought back / Share price
Formula for new BVPS ?
(Equity - value bought back) / (Previous shares Q - Q boughtback)
How will EPS chnage if
Kd(1-t) < E/P
EPS will increase
How will EPS chnage if
Kd(1-t) > E/P
E/P is inverted (P/E)
EPS will decrease
Formula for FCF coverage ratio
FCFE / (Div + Repurchase)
FCF Coverage ratio = 1
All cash returned to shareholders
FCF Coverage ratio < 1
Improving liquidity ratio
Dividend Coverage ratio
1 / Div Payout ratio
NI / Div
EPS / DPS
What is stable dividend policy
Most common.
Dividends are based on long-term forecasts of sustaniable earnings
Formula for Stable dividend Policy
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
Constant Div Payout Ratio
Dividend fluctuates with earnings
Formula for Dividend payout ratio
Value of dividend paid out / Net income
DPS / EPS
Cost of Capital Factors
Top-Down: External
Bottom-up: Company Specific
How will Cost of Capital change if capital avaliability increases or decreases?
Increase: Lowers Cost of Capitl
Decreases: Increases Cost of Capital
Inverse relationship
What will the Cost of Capital be if a company has revenue concertration?
Increases Cost of Capital
Cost of capital security features
Debt: Calliable
Increases Cost of capital
Cost of capital security features
Debt: putable
Decreases Cost of Capital
Cost of capital security features
Debt: Convertable
Lowers Cost of Capital
Cost of capital security features
Equity: Prefered
Lowers cost of capital
Cost of capital security features
Equity: Common
Increases Cost of Capital
Formula for enterprise value
MV of Eqity + MV of Debt - Cash
Factors that make up the Cost of debt Kd = rd
Risk free rate + Creidt Spread
Factors that make up the Cost of equity Ke = re
Equity Risk Premium + Idiosyncrated Risk Premium
Market risk + Company Spicific risk
Cost of Capital Factor: Top Down
Capital Avaliability
Market Conditions
Legal and regulatory consideration
Tax Jurisdiction
Cost of Capital Factor: Bottom up
Revenue, earnings, cash flow volatility
Asset nature and liquidity
Financial strength and profitability
Security features
What is a “spin-off”
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.
What is a “Split-off”
Some of the partent company shareholders are given shares in a newly created entity in exchange for their shares of the parent compnay
What is What is “Comparable Company analysis”
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.
What is needed to estimate a fair takeover price of a company?
Estimate a fair takeover premium and use the information to adjust the stock price.
What is What is “Comparable Transaction analysis”
Use a valuation multiple from historical acquisition of similar targets.
Multiple would already include takeover premium.
If an acquirer wanted to shift the risk of realizing synergies onto the target’s shareholders, the aqcuirer would make 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.
What is Tax imputation system
Pre tax earnings are taxed at shareholder marginal tax rate
