dividends Flashcards
What are dividends?
Who decides how much dividend to pay?
How are dividends typically paid?
What are dividends?
Answer: Dividends are payments to shareholders from a company’s profits.
Who decides how much dividend to pay?
Answer: Management decides how much to pay.
How are dividends typically paid?
Answer: Typically paid in cash, either quarterly or half-yearly (interim and final dividends).
What is a cash dividend?
What is a scrip dividend?
What is a share repurchase?
What is a cash dividend?
Answer: A dividend paid in cash.
What is a scrip dividend?
Answer: A dividend paid in additional shares instead of cash.
What is a share repurchase?
Answer: When a company buys back shares from shareholders, offering them the choice to sell.
How does the investment decision impact dividend policy?
How does the financing decision impact dividend policy?
How does the investment decision impact dividend policy?
Answer: Growing firms reinvest profits, so dividends are low or zero.
How does the financing decision impact dividend policy?
Answer: Companies may borrow to pay dividends if they have legal accumulated profits.
What is the dividend policy for new companies?
What is the dividend policy for mature or declining companies?
What is the dividend policy for new companies?
Answer: They usually pay low or no dividends.
What is the dividend policy for mature or declining companies?
Answer: They often pay higher dividends.
What does Modigliani & Miller’s Dividend Irrelevancy Proposition state?
What assumptions does the M&M theory rely on?
What does the Residual Theory suggest about dividends?
What happens if a company retains cash unnecessarily?
What does Modigliani & Miller’s Dividend Irrelevancy Proposition state?
Answer: Dividends are irrelevant to company value; focus on profitable investments first, then pay dividends if cash is left.
What assumptions does the M&M theory rely on?
Answer: No taxes, no costs, perfect markets, rational investors, and managers/shareholders having the same information and objectives.
What does the Residual Theory suggest about dividends?
Answer: Dividends should only be paid after all positive NPV projects are funded.
What happens if a company retains cash unnecessarily?
Answer: Shareholder wealth is destroyed, as they don’t get their required return.
Real-World Considerations
What is the Clientele Effect?
How is dividend income taxed?
How are capital gains taxed?
How do dividends signal company performance?
What is the Clientele Effect?
Answer: Shareholders choose companies based on dividend preferences, such as income vs. growth.
How is dividend income taxed?
Answer: Under Income Tax rules.
How are capital gains taxed?
Answer: Under Capital Gains Tax rules when shares are sold.
How do dividends signal company performance?
Answer: Increasing dividends signal optimism; decreasing dividends indicate caution.
Real-World Considerations
What is the ‘bird in the hand’ argument?
How does Agency Theory explain high dividend payouts?
What practical factors influence dividend decisions?
What is the ‘bird in the hand’ argument?
Answer: Shareholders prefer dividends now over uncertain future growth.
How does Agency Theory explain high dividend payouts?
Answer: High dividends give shareholders more control over company investments.
What practical factors influence dividend decisions?
Answer: Shareholder expectations, company lifecycle, liquidity, profit stability, and competitor strategies.
Choosing a Dividend Policy
What does the Dividend Payout Ratio (DPR) show?
What does a low payout ratio signal?
What does a payout ratio over 100% indicate?
What is the formula for the Dividend Payout Ratio?
Choosing a Dividend Policy
What does the Dividend Payout Ratio (DPR) show?
Answer: The percentage of a company’s earnings paid as dividends to shareholders.
What does a low payout ratio signal?
Answer: That the company is reinvesting most of its earnings into growth.
What does a payout ratio over 100% indicate?
Answer: The company is paying more in dividends than it earns.
What is the formula for the Dividend Payout Ratio?
Answer:
DPR = Total dividends / Profit after tax
Choosing a dividend policy:
What is a constant dividend policy?
What is the advantage and disadvantage of a constant dividend policy?
What is a growing dividend policy?
What are the pros and cons of a growing dividend policy?
What is a constant dividend policy?
Answer: Paying a fixed dividend per share every year.
What is the advantage and disadvantage of a constant dividend policy?
Answer: It’s easy for shareholders, but inflation reduces real returns.
What is a growing dividend policy?
Answer: Increasing the dividend yearly by a set percentage.
What are the pros and cons of a growing dividend policy?
Answer: It covers inflation but may strain profits if earnings drop.
