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Financial Markets > Distribution to Shareholders > Flashcards

Distribution to Shareholders Flashcards

1
Q

What are the 5 potential good uses of FCF

A
  1. Interest Payments
  2. Principal Repayments
  3. Purchase of Short-Term Investments
  4. Paying Dividends
  5. Stock Repurchases
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2
Q

The Distribution Policy of a Company dictates?

A
  1. The level of distribution
  2. The form
  3. The Stability
  4. Frequency
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3
Q

The amount distribution is dependent on the investors?

A

preference: capital gains or dividends

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4
Q

T or F: The target payout ratio is already included in the target distribution ratio

A

T

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5
Q

The investor preference for returns will be determined by the

A

target distribution ratio

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6
Q

which is the amount to be paid in cash dividends to shareholders.

A

the target payout ratio

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7
Q

How many years does a planning horizon need?

A

often 5 years

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8
Q

What are needed to create dividend policies?

A
  • Forecast Capital
  • Capital Structure
  • Equity Needs
  • Target Payout
  • Dividend Growth Rate
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9
Q

What is the four factors of an optimal distribution ratio?

A
  1. Investors’ Preference
  2. Firm’s Investment Opportunity
  3. Target Capital Structure
  4. Availability and cost of external capital
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10
Q

FACTORS THAT INFLUENCE DISTRIBUTION DECISIONS: debtors will have first claim to your earnings

A

Bond Indentures

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11
Q

FACTORS THAT INFLUENCE DISTRIBUTION DECISIONS: some shareholders have earlier claim to dividends

A

Preferred Stock Restrictions

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12
Q

FACTORS THAT INFLUENCE DISTRIBUTION DECISIONS: dividends can not exceed retained earnings

A

Impairment of Capital Rule

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13
Q

FACTORS THAT INFLUENCE DISTRIBUTION DECISIONS: shortage of cash

A

Availability of Cash

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14
Q

Shortage of cash in bank can be offset by

A

Borrowings

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15
Q

FACTORS THAT INFLUENCE DISTRIBUTION DECISIONS: prevent wealthy individuals from using corporations to avoid personal taxes

A

Improperly Accumulated Earnings Tax

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16
Q

The factor of improperly accumulated earnings tax is generally only applicable to

A

privately owned firms

17
Q

FACTORS THAT INFLUENCE DISTRIBUTION DECISIONS: The floatation costs incurred when selling the stocks will have an impact on the level of future payouts

A

Cost of Selling New Stock

18
Q

FACTORS THAT INFLUENCE DISTRIBUTION DECISIONS: If the firm can adjust its debt ratio without raising costs sharply, then it can pay the expected dividend—even if earnings fluctuate—by increasing its debt ratio.

A

Ability to Substitute Debt for Equity

19
Q

FACTORS THAT INFLUENCE DISTRIBUTION DECISIONS:
If management is concerned about maintaining control

A

Control

20
Q

Theories: the value of the firm depends only on the income produced by its assets, not on how this income is split between dividends and retained earnings.

A

Dividend Irrelevance Theory

21
Q

Theories: stock’s risk declines as dividends increase.

-Dividends are favored because less risky

A

Bird in the Hand Theory

22
Q

Theories: capital gains are taxed lower

A

Tax Preference Theory

23
Q

According to the signaling hypothesis, what does an increase in dividend mean?

A

assumption that the firms believe that higher earnings will happen in the future

24
Q

Investor group will prefer different dividend policies

A

The clientele effect

25
Q

What is the effect of changing divident policies on stock prices?

A

It will fluctuate

26
Q

What does the residual dividend model do to WACC

A

minimizes WACC, through flotation and equity signaling costs

27
Q

What is the formal for the residual distribution model?

A

Dividends = Net Income - ((Target Equity Ratio)(Total Capital Budget))

28
Q

What is the formula for the payout ratio?

A

Distribution Value/ Net Income

29
Q

What is the effect of low or high investment opportunities on dividends?

A

Few IO= Higher Dividend Payout
High IO= Lower Dividend Payout

30
Q

What does a stock split/dividend?

A

get the stock price in an optimal range

31
Q

What signal is taken by the investors when stock splits are done

A

Positive Signals

32
Q

Shareholders can automatically reinvest their dividends in shares of the company’s common stock. Get more stock than cash.

A

Dividend reinvestment plan

33
Q

Why are reinvestment plans popular?

A

Enable stockholders to buy additional shares without brokerage fees

34
Q

DRIP Plan: Cash to be reinvested are turned over to trustee who buy shares on the open market

A

Open Market Purchase Plan

35
Q

DRIP Plan:Firm issues new stock to DRIP enrollees, keeps money and uses it to buy assets.

A

New Stock Plan

36
Q

Purposes of Repurchasing Stocks?

A
  1. Recapitalization
  2. Employee Stock Options
  3. Excess Cash
37
Q
A

Financial Markets (1 decks)

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