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Finance > Dividends > Flashcards

Dividends Flashcards

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1
Q

when do you decide that you should give dividends

A

if you cannot find investments that make your minimum acceptable rate, return the cash to owners of your business

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2
Q

what does how much cash you return as dividends depend on

A

current and potential investment opportunities

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3
Q

how to calculate dividend payout

A

dividends/net icoem

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4
Q

how to calculate dividend yield

A

dividends per share /stock price

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5
Q

what does the dividend payout calculate

A

the percentage of earnings that the company pays in dividends

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6
Q

what does the dividend yield calculate

A

the return that an investor can make from dividends alone

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7
Q

what are the two types of ways firms can pay cash to shareholders

A

pay cash dividends

share buybacks

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8
Q

what is the difference between growth stocks and income stock

A

growth stock is bought so its value grows over time and can be resold for higher

income stocks are stocks from firms that give dividends, earnings made while you still have ownership of the stocks

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9
Q

how did dividend payments change with the pandemci

A

companies have less earnings
more uncertainty
cash dividends are more attractive

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10
Q

why are dividend payments sticky

A

once given they are expected to continue

dividend payments are attractive to pension funds

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11
Q

what is a cash dividend

A

a payment by the firm to its shareholders

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12
Q

why might dividend payments be restricted

A

retained earnings fall below a certain minimum level

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13
Q

which comes first

  • interest and tax
  • dividends
A

interest and tax

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14
Q

what are the 4 types of cash dividends

A

regular
extra cash dividend
special cash dividend
liquidating dividend

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15
Q

what is a regular cash dividend

A

cash payments made directly to stockholders, usually each quarter

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16
Q

why are extra and special cash dividends different

A

indication that they are once off and will not be repeated in the future

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17
Q

when do liquidating dividends happen

A

when some or all of the business has been sold

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18
Q

what are all the dates included in a dividend payment

A

declaration date
ex dividend date
date of record
date of payment

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19
Q

what is the declaration date of a dividend

A

board declares the dividend and it becomes a liability of the firm

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20
Q

what is the ex dividend date

A

after that date, even if you buy shares, you won’t receive the dividend

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21
Q

when the ex dividend date is announced, what usually happens to the share price

A

drops by about the amount of the dividend

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22
Q

what is the date of record

A

holders of record are determined

these will receive the payment

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23
Q

what is the date of payment

A

cheques are posted

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24
Q

what is a stock repurchase / share buyback?

A

when the company buys shares back from shareholders for cash

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25
Q

how does the balance sheet change when dividends are paid

A

cash side (assets) reduces

ownership equity reduces

the shareholders now have shares in a smaller firm

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26
Q

what type of tax are shareholders liable to when dividends are given out as share buybacks

A

capital gains tax

rather than income tax

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27
Q

how does the balance sheet change with share buybacks

A

total shares decrease

cash stays the same

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28
Q

who decides who gets their shares as buybacks rather than cash

A

shareholders

29
Q

what are the two questions a financial manager must ask about their payout policy

A

when they should return the cash

how they should return the cash

to shareholders

30
Q

what three factors need to be passed to pay out dividends

A
  1. is there a positive cash flow
  2. is there a prudent debt policy
  3. is there sufficient cushion for cutbacks
31
Q

what are the three factors effecting how the firm decides to pay back their cash to shareholders

A

tax
information content
flexibility

32
Q

what type of tax is paid on sale of shares

A

capital gains tax

33
Q

what type of tax is paid on dividends by investor

A

income tax

34
Q

which type of tax is lower in most places

  • capital gains
  • income tax
A

capital gains

35
Q

what signal does stock repurchases show from management

A

management believes current price is low

36
Q

does the stock price increase or decrease when repurchases are announced

A

increase

37
Q

what sort of information content is signaled by announcing the initiation or changing of level of cash dividends

A

announcing/more - firm has no new investment opportunities

decreasing - firm isn’t making as much retained earnings

38
Q

what is a dividend payout ratio

A

firm pays a percentage of their earnings as dividends. so if earnings increase, so too would dividends

39
Q

if a firm intends to reduce their dividends for reinvestment purposes, how can they minimise the negative signalling

A

flag early to shareholders your intention

40
Q

which give the firm more flexibiilty

  • buybacks
  • cash dividends
A

share buybacks

41
Q

how do share buybacks make the dividend discount model harder to use

A

hard to predict when buybacks will occur and number of shares repurchased

42
Q

what is a stock dividend or a stock split

A

distributions of additional shares to a firm’s stockholders

43
Q

a larger stock dividend is usually greater than what percentage

A

25%

44
Q

what is a common reasonining for firms to give stock dividends

A

return stock price to a more desirable trading range

45
Q

what is dividend policy

A

the decision to pay dividends or repurchase shares versus retaining funds to reinvest in the firm

46
Q

why do dividends matter to the value of stock

A

value of stock is present value of future dividend

47
Q

how does a firm reinvesting now mean that they could pay higher dividends in the future

A

they will grow in size and could make more earnings

48
Q

what do modigliani and miller propose in their irrelevance proposition

A

timing of dividend payments are irrelevant to share value and should only be offered after all attractice investment projects have been invested

if the company can offer them the required return by reinvesting, the shareholders are indifferent between capital growth and dividend

49
Q

what are the assumptions for modiglilani and millers dividend irrelevance proposition

A
  1. there are no taxed
  2. there are no transaction costs
  3. all investors can borrow and lend at the same risk free rate
  4. all investors have free access to all relevant information
  5. investors are indiferrent between dividends and capital gains
50
Q

why is is not true that the investors are indifferent

why can dividend policy increase firm value

A
  1. certainty of return
  2. prevents managers from wasting funds
  3. provides information (signaling)
  4. attracts natural clientele
51
Q

what is uncertainty resolution

A

there is no guarantee that the higher future dividend payments will actually happen

instead, shareholders are happy enough to just get dividends now

may not be an actual risk but a perceived risk

52
Q

how can owners gain more control over the use of the money in the firm

A

demand a higher payout ratio

53
Q

how does owners insisting on a higher payout ratio control managers

A

with less financial slack they have less flexibility and must ask to raise external capital for investments

54
Q

what signals do dividend increases send

A

management have good long term prospects for the company

as dividends are sticky

55
Q

what sort of signals do dividend cuts send to the investrors

A

bad news, the firm is earning less

56
Q

what sort of signals does announcing first dividend payments send to the investors

A

mixed
could take as a bad signal - that the firm has runout of investment opportunities

also means the firm is steadying out to a more stable and more sustainable growth

57
Q

who are the type of clientele that prefer income stocks

A

retirees, pension funds

58
Q

who are the type of lclientele that prefer growth stocks

A

wealthy middle aged investors

59
Q

why do firms consider their clientele when it comes to dividend policy

A

knowing your investors means you can target a certain group

inconsistency will lead to a lack of popularity with each group

60
Q

what are the reasons for low dividends

A

costs of raising external funding

dividend restrictions eg debt contracts

61
Q

how would a firm convince the shareholders that they will not be paying dividends

A
  • use the money instead to reinvest into the firm
  • should be indifferent if the rate is over the minimum expected
  • however they do like certainty of return and sooner returns have less perceived risk
62
Q

why would a firm choose to do share buybacks over cash dividends

A 
less sticky (flexibility for both firm and shareholder)
tax treatments
attract certain clientele
dilute shares
not share too much information content
63
Q

why does dividend policy matter despite what M&M say

A
  • signalling and information content
  • attract a certian type of clientele
  • prevents managers from wasting funds
  • certainty of return
  • shareholders could reinvest elsewhere and get more for their money
64
Q

why would some companies choose not to pay dividends

A

no flexibility

use money to reinvest

65
Q

Theoretically, why are investors indifferent to dividend policy

A

they can reinvest dividends to get more shares

or sell shares to raise cash

i.e. they can replicate either payment method on their own
(homemade dividend)

66
Q

what tax is paid on dividends received

A

income tax
dwt = 25%

67
Q

what tax is paid when investor sells shares

A

capital gains tax

68
Q

for long term investors - which is a better option, dividends or share repurchases

A

share repurchases

as CGT can be deferred until the asset is sold, which could be indefinitely

69
Q

why does volume of trade increase around period from dividend declaration date to ex dividend date

A

some shareholders will be selling their shares - to avoid income tax

others who will get lower or no tax will be buying shares to benefit from the dividend

the reverse is done ex dividend date

Finance (12 decks)

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