Corporate Issuer

Question 1

Name the 3 different types of Cash Dividend

Answer 1

Regular
Extra (Special)
Liquidating

Question 2

Name the 3 different types of Non Cash Dividend

Answer 2

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

Question 3

What are three different Dividend Reinvestment Plans?

Answer 3

Open market: Company purchase shares in the open market

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

Hybrid: Either or.

Question 4

What is a Extra Dividend?

Answer 4

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

Question 5

What is liquidating dividend?

Answer 5

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

Question 6

According to Tax effect theory

Tax div > Tax Capital gains

Answer 6

Investors prefer lower payout ratio or repurchase from a distribution

investors will pay more for lower payout ratio

Question 7

According to Tax effect theory

Tax div < Tax Capital gains

Answer 7

Investors prefer cash dividend

Question 8

According to Tax effect theory

Tax div = Tax Capital gains

Answer 8

Investors prefer lower payout ratio or repurchase from a distribution

investors will pay more for lower payout ratio

Question 9

The two different types of Ownership structure

( Corporate Governane ESG)

Answer 9

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

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

Question 10

Ownership Strucutre: Dispersed Ownership, dispersed voting power

Answer 10

Weak shareholders, strong manager

Principle agent conflict can arise

Can be mitigated if controlling sharegolders are present

Question 11

Ownership Strucutre: Concentrated Ownership, concentrated voting power

Answer 11

Strong shareholders weak managers

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

Question 12

Describe Jensen’s FCF Hypothesis

Answer 12

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

Question 13

What is the “bird in hand argument”?

Answer 13

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.

Question 14

Formula for shares bought back?

Answer 14

Q shares bought back / Share price

Question 15

Formula for new BVPS ?

Answer 15

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

Question 16

How will EPS chnage if

Kd(1-t) < E/P

Answer 16

EPS will increase

Question 17

How will EPS chnage if

Kd(1-t) > E/P

E/P is inverted (P/E)

Answer 17

EPS will decrease

Question 18

Formula for FCF coverage ratio

Answer 18

FCFE / (Div + Repurchase)

Question 19

FCF Coverage ratio = 1

Answer 19

All cash returned to shareholders

Question 20

FCF Coverage ratio < 1

Answer 20

Improving liquidity ratio

Question 21

Dividend Coverage ratio

Answer 21

1 / Div Payout ratio

NI / Div

EPS / DPS

Question 22

What is stable dividend policy

Answer 22

Most common.

Dividends are based on long-term forecasts of sustaniable earnings

Question 23

Formula for Stable dividend Policy

Answer 23

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

Question 24

Constant Div Payout Ratio

Answer 24

Dividend fluctuates with earnings

Question 25

Formula for Dividend payout ratio

Answer 25

Value of dividend paid out / Net income DPS / EPS

Question 26

Cost of Capital Factors

Answer 26

**Top-Down**: External **Bottom-up**: Company Specific

Question 27

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

Answer 27

**Increase**: Lowers Cost of Capitl **Decreases**: Increases Cost of Capital **Inverse relationship**

Question 28

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

Answer 28

Increases Cost of Capital

Question 29

**Cost of capital** security features Debt: **Calliable**

Answer 29

Increases Cost of capital

Question 30

**Cost of capital** security features Debt: putable

Answer 30

Decreases Cost of Capital

Question 31

**Cost of capital** security features Debt: Convertable

Answer 31

Lowers Cost of Capital

Question 32

**Cost of capital** security features Equity: Prefered

Answer 32

Lowers cost of capital

Question 33

**Cost of capital** security features Equity: Common

Answer 33

Increases Cost of Capital

Question 34

Formula for enterprise value

Answer 34

MV of Eqity + MV of Debt - Cash

Question 35

Factors that make up the **Cost of debt** Kd = rd

Answer 35

Risk free rate + Creidt Spread

Question 36

Factors that make up the **Cost of equity** Ke = re

Answer 36

Equity Risk Premium + Idiosyncrated Risk Premium Market risk + Company Spicific risk

Question 37

**Cost of Capital Factor**: Top Down

Answer 37

Capital Avaliability Market Conditions Legal and regulatory consideration Tax Jurisdiction

Question 38

**Cost of Capital Factor**: Bottom up

Answer 38

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

Question 39

What is a "**spin-off**"

Answer 39

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.

Question 40

What is a "**Split-off**"

Answer 40

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

Question 41

What is What is "**Comparable Company analysis**"

Answer 41

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.

Question 42

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

Answer 42

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

Question 43

What is What is "**Comparable Transaction analysis**"

Answer 43

Use a valuation multiple from historical acquisition of similar targets. Multiple would already include takeover premium.

Question 44

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

Answer 44

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.

Question 45

What is Tax imputation system

Answer 45

Pre tax earnings are taxed at shareholder marginal tax rate