Dividends And Dividend Policy

Question 0

What is dividend preference theory

Answer 0

Investors prefer certainty of current cash to future capital gains

Question 1

What is MM theory on dividends

Answer 1

Dividend policy is irrelevant because you can home make dividends by selling shares

Question 2

What does tax aversion theory say about dividends

Answer 2

Investors are tax averse to dividends and would prefer companies to buy back share (when div tax > cap gains tax)

Question 3

What is signalling effect

Answer 3

Dividend changes convey info about future earnings

Unexpected increase = good
Unexpected decrease = bad

Question 4

What is clientele effect

Answer 4

Varying preferences for dividends of different groups of investors (individuals, institutions, corps)

Question 5

How to calc tax rate on dividends with double taxation system

Answer 5

Effective rate = corp tax rate + (1 - corp tax rate)(individual tax rate)

Question 6

How is tax rate on dividends calculated differently with split rate system

Answer 6

Tax earnings distributed as dividends at a lower rate than retained earnings (offset dividend tax to individuals)

Question 7

How does imputation tax system work

Answer 7

Taxes paid at corp level are attributed to shareholder, so all taxes effectively paid at shareholder rate

Question 8

What is stable dividend policy

Answer 8

Expected dividend = (previous dividend) + ((expected increase jn eps)*(target payout ratio) * (adjustment factor)

Adjustment = 1/#years to adjust

Question 9

What are 5 reasons for share repurchases (over dividends)

Answer 9

Potential tax advantages (if dividend tax higher)
Share price support/signalling
Added flexibility (no sticky dividends)
Offset employee stock option dilution
Increase financial leverage

Question 10

How to calc two dividend coverage ratios

Answer 10

Dividend covg ratio = NI/dividends

FCFE covg ratio = FCFE/(dividends+ share repurchases)