Corporate Issuers Flashcards
Explain the impact of different dividend types on shareholder wealth and ratios.
Regular Cash: Reduces cash, reduces equity. Wealth neutral (ignoring taxes/fees). Extra/Special Cash: Same as regular cash, but signals one-off event. Liquidating: Return of capital, reduces equity/paid-in capital. Stock Dividend/Split: Increases shares outstanding, reduces price per share. Wealth neutral. Reduces EPS, BVPS. Reverse Split: Decreases shares, increases price. Wealth neutral. Increases EPS, BVPS.
Contrast theories of dividend policy (MM, Bird-in-Hand, Tax Aversion, Clientele).
MM Irrelevance: In perfect markets, dividend policy doesn’t affect firm value. Bird-in-Hand: Investors prefer dividends (less risky than future capital gains). Tax Aversion: Investors prefer capital gains if taxed lower than dividends. Clientele: Different investor groups prefer different payout levels; firms attract specific clienteles.
What signals might dividend changes convey?
Initiation/Increase: Positive signal about future prospects, management confidence. Decrease/Omission: Negative signal about future prospects, financial distress.
How do agency costs affect payout policy?
Shareholder-Manager: Managers may retain cash (empire building) instead of paying dividends. High payouts reduce free cash flow available for managers. Shareholder-Debtholder: Shareholders may prefer high-risk projects or high payouts, disadvantaging debtholders. Debt covenants may restrict dividends.
What factors affect dividend policy in practice?
Investment opportunities (more opps -> lower payout), Expected earnings volatility (higher vol -> lower payout), Financial flexibility needs, Flotation costs (retained earnings cheaper than new equity), Contractual/legal restrictions, Tax considerations, Clientele preferences.
Compare Stable Dividend and Constant Payout Ratio policies.
Stable Dividend: Maintain steady $/share dividend, increase gradually with sustainable earnings growth. Preferred by market (predictability). Constant Payout Ratio: Pay fixed % of earnings; dividends fluctuate with earnings (more volatile).
What are common share repurchase methods?
Open Market: Buy shares in the secondary market (most common). Fixed Price Tender Offer: Offer to buy specific number of shares at a set premium. Dutch Auction: Offer to buy shares within a price range; accept lowest offers first. Direct Negotiation: Buy back shares from a specific major shareholder.
How do share repurchases affect EPS and BVPS?
EPS: Always increases (fewer shares outstanding). BVPS: Increases if Repurchase Price < BVPS; Decreases if Repurchase Price > BVPS.
How is dividend safety measured?
Dividend Payout Ratio: Dividends / Net Income. Dividend Coverage Ratio: Net Income / Dividends. FCFE Coverage Ratio: FCFE / (Dividends + Share Repurchases) (considers ability to pay from free cash flow).
Contrast ownership structures globally (Concentrated, Dispersed, Hybrid).
Concentrated: One dominant shareholder (family, govt, company). Potential Principal-Principal conflict (controlling vs. minority shareholders). Common globally. Dispersed: Many shareholders, none dominant. Potential Principal-Agent conflict (shareholders vs. managers). Common in US, UK, Aus, Ire. Hybrid: Mix of both structures (Can, Ger, Jap).
What are mechanisms for gaining control with less equity in concentrated structures?
Dual-class shares (superior voting rights), Vertical ownership (pyramids/holding companies), Horizontal ownership (cross-holdings), Interlocking directorates.
Compare one-tier and two-tier board structures.
One-Tier: Single board with executive and non-executive directors (common). Two-Tier: Supervisory board (oversees management, auditors) + Management board (runs company) (Ger, Rus).
What indicates effective corporate governance?
Independent board majority, separation of CEO/Chair roles, diverse & skilled directors, independent audit/compensation/nomination committees, transparent & appropriate executive compensation (linked to performance, clawback policies), protection of minority shareholder rights.
How are ESG risks and opportunities identified and evaluated?
Through analysis of company disclosures, ESG rating agencies, industry reports, news flow. Focus on material risks/opportunities specific to the company and industry (e.g., carbon emissions for energy, data privacy for tech, labor practices for retail). Assess potential impact on financials, reputation, regulation.
How do Top-Down vs. Bottom-Up factors impact Cost of Capital?
Top-Down (Macro): Capital availability, Inflation, Market stability, Legal/Regulatory environment, Investor protection. Bottom-Up (Company Specific): Business risk (revenue/earnings volatility), Operating leverage, Financial leverage, Asset tangibility, Corporate governance, Security features (call/put/convertibility).
How is the Cost of Debt estimated?
Traded Debt: Use YTM on existing liquid bonds. Non-Traded/Private: Use credit rating (actual or synthetic) and add corresponding spread to risk-free rate (Matrix pricing/Yield Spread). Bank Debt: Rate on recent loans. Leases: Implicit rate in capital leases.
How is the Equity Risk Premium (ERP) estimated?
Historical: Average difference between broad equity index return and government bond yield. Issues: choice of index/bond, time period, survivorship bias, arithmetic vs. geometric mean. Forward-Looking: Dividend Discount Model (GGM ERP = Div Yield + Growth - LT Bond Yield), Macro (Supply-side) models, Surveys.
Compare methods for estimating Required Return on Equity (Cost of Equity).
CAPM: Re=Rf+β×ERP. Multifactor Models (e.g., Fama-French): Add premiums for factors like size, value. Build-Up Method: $R_f + ERP + Size Premium + Specific Risk Premium (+ Industry Premium). Bond Yield Plus Risk Premium: Company’s LT Debt YTM + Historical Equity-Debt Premium. DDM-Based: Implied return from P0=D1/(Re−g).
How is Cost of Equity adjusted for private companies?
Often use Build-Up method or Expanded CAPM, adding premiums for size and company-specific risk (e.g., lack of diversification, key person risk). Beta may be estimated from public comparables (unlevered/relevered).
What discounts/premiums apply to private company valuations?
Discount for Lack of Control (DLOC): Applied to non-controlling interests. Discount for Lack of Marketability (DLOM): Applied because shares are illiquid. Control Premium: Added when valuing a controlling stake (inverse of DLOC).
Describe approaches to private company valuation (Income, Market, Asset-Based).
Income: DCF (FCFF/FCFE), Capitalized Cash Flow (CCF = CF1 / (WACC-g)). Market: Guideline Public Company Method (GPCM - use multiples from public peers), Guideline Transactions Method (GTM - use multiples from M&A of similar private firms), Prior Transactions. Asset-Based: Adjust book value to fair value; may ignore intangible assets/goodwill.
Define common corporate restructuring types.
Investment Actions: Equity investments, JVs, Acquisitions. Divestment Actions: Sales, Spin-offs, Split-offs, Liquidations. Cost/Balance Sheet Restructuring: Cost reduction programs, Debt restructuring, Bankruptcy reorganization (Chapter 11/7)
