Dividend

Question 1

dividend

Answer 1

distribution from firm to shareholders

Question 2

payout policy

Answer 2

the way a firm chooses between alternative ways to cash out to shareholders

Question 3

div policy

Answer 3

a subset of wider issues of financing decision making
tradeoff between paying out earnings or using them as a source of finance

Question 4

there’s a strong interrelationship between

Answer 4

firm financing, investment and dividend decisions

Question 5

dividend timeline (which comes first…)

Answer 5

declaration date
ex div date
record date
payable date

Question 6

declaration date

Answer 6

firm declares and announces the next regular, irregular or special dividend (if have surplus cash)

Question 7

ex div date

Answer 7

usually 1 biz day before record date
date by which people need to own the stock to receive divs
buyers on or after this day will not receive div

Question 8

SP usually drops on

Answer 8

ex div date

Question 9

record date

Answer 9

shareholders recorded by this date who will receive div

Question 10

payable date

Answer 10

eligible shareholders will get div paid
could be months later

Question 11

price behaviour of SP

Answer 11

theoretically if markets are efficient share price will fall by exact D amount on ex-div date
but typically fall by less than that due to taxation

Question 12

is there an optimal div policy?
w and w/out PCM

Answer 12

in PCM div policy has no affect on shareholders wealth as investors can just recreate CFs if needed
without PCM either doesn’t matter or it does and high or low div payout is preferred

Question 13

preference of high or low div payout ratio

Answer 13

low means firm is reinvesting lots more so could be a sign of expansion or not doing well

too high could be unsustainable and means paying out too many earnings, but could also be a good sign

Question 14

3 common div policies

Answer 14

residual
smoothed
stable

Question 15

residual div policy

Answer 15

leftover residuals go to payout
firm uses earnings to pay capital expenses then divs
annual divs fluctuate depending of earnings and investment needs
can be a volatile policy making divs uncertain in market

Question 16

smoothed (target pay out) div policy

Answer 16

firms only raise divs when earnings are thought to be solid
represents the long-term average residual payout policy
constant
fluctuating div amount
aims for divs to equal long term diff between expected profits and expected investment needs

Question 17

stable div policy

Answer 17

no matter what earnings are pay an exact C amount of D
could be increasing
increase C in response to increasing expected profits in future

Question 18

what is a less formal type of stable div policy?

Answer 18

low, regular, div + extra policy

Question 19

dividend policy and investment policy cross over and MM view

Answer 19

should not forgo NPV + projects in order to raise Ds
MM suggest firms investment policy is set well before and not impacted by firm changes

Question 20

MM irrelevance theory

Answer 20

div policy has no effect on firm value
there is a tradeoff between retaining profits for investments or paying D and issues new shares to replace cash paid out as D

Question 21

MM irrelevance theory states that firm value is determined by

Answer 21

earning power of the firms assets

Question 22

does paying a D or issuing new shares change firm value or wealth of old shareholders?

Answer 22

no

Question 23

the gain in D income is offset by

Answer 23

loss of capital gains

Question 24

SP drops by ___ but this is offset by __

Answer 24

D
receiving D

Question 25

repurchasing shares decreases __ but keeps __ constant

Answer 25

Veq and no shares issued but SP same

Question 26

corporate dividend is

Answer 26

homemade dividend

Question 27

when to sell or buy shares... (homemade)?

Answer 27

if D < desired, sell to gain desired cash if D> desired, buy additional shares with excess( creation of homemade capital gain)

Question 28

if participation occurs, decrease in holding value is

Answer 28

offset by cash received by repurchase

Question 29

classical tax system

Answer 29

double taxation of div income @ firms and personal level tax on cap gains < tax on div income preference for earnings retention than div payment

Question 30

Dividend imputation system

Answer 30

double taxation of retained earnings @ firm tax level then capital gains when shares are sold

Question 31

SP for Dividend imputation system

Answer 31

SP decreases by > D due to value of franking credit

Question 32

in Dividend imputation system firm chooses earnings distribution:

Answer 32

earnings retention (CG) or payment of franked divs (FD) or unfranked divs (UD) choice depends on shareholders personal tax and their status (usually franked divs is preferred)

Question 33

how does the Dividend imputation system work?

Answer 33

firm pays tax on domestic sourced income at Tc div paid from after tax net income to shareholders they recieve imputation credit for the amount of corp tax paid shareholder can deduct this amount from tax payable firm essentially pays tax on D income on behalf of investors

Question 34

with franked credits actual SP usually

Answer 34

less than imagined as div income you receive requires you to pay income tax on it also not a controlled experiment

Question 35

6 non-tax reasons for relevance of div policy

Answer 35

- info effects/ div signalling - current income preferences - div stability -agency costs -share issue costs for firm - transaction costs to investors - div clientele

Question 36

info effects and div signalling

Answer 36

increase in D means increase in SP share holders think its a good sign and vice versa sends bad signs to market

Question 37

current income preferences

Answer 37

some shareholders need stable income from shares

Question 38

div stability

Answer 38

shareholders prefer constant stable flow and are more likely to pay a premium to reduce risk

Question 39

agency costs

Answer 39

divs reduce FCF to wasteful managers

Question 40

share issue costs for firms

Answer 40

firm pays div and needs to issue new shares to fund investment

Question 41

transaction costs for investors

Answer 41

costs to buy and sell shares low payout: - sell shares and brokerage cost/tax high payout: - reinvest more shares - brokerage cost

Question 42

div clientele

Answer 42

different investors invest with firms that align their div likings which affects supply and demand of stocks

Question 43

stock dividend

Answer 43

a payment to shareholders that of additional shares not cash (like DRIP)

Question 44

stock div and SP

Answer 44

reduces SP as Veq is divided upon more shares

Question 45

stock split

Answer 45

stock prices too high so split them so lower price and then more attractive to smaller investors

Question 46

shares repurchase

Answer 46

firms offer to shareholders to buy back shares at a fixed price could be financed through d or e

Question 47

what does a share repurchase influence?

Answer 47

ownership structure, cap structure, EPS, SP(+ usually),

Question 48

What do share repurchases send as market signalling?

Answer 48

a good sign if the company wants more shares

Question 49

7 motives for shares repurchase

Answer 49

div substitution shareholder preference for divs vs cap gains increased performance financial flexibility FCF Info signalling executive compensation

Question 50

div substitution

Answer 50

instead of paying div

Question 51

shareholder preference for divs vs cap gains

Answer 51

if want liquidity sell shares if want capital gains hold onto

Question 52

increased performance

Answer 52

increases EPS, D/E ratio less shares so increased performance

Question 53

financial flexibility

Answer 53

divs are commitment so repurchases don't have that commitment

Question 54

FCF

Answer 54

using cash to buy back shares decreases FCF to wasteful managers

Question 55

info signalling

Answer 55

good sign if a firm is repurchasing

Question 56

executive compensation

Answer 56

avoids negative effect of divs on share and option value as when u pay divs SP decreases

Question 57

in the real world what happens to SP

Answer 57

increases on announcement of share repurchases