finance lec 8 - clientele effect and div policies

Question 1

diff investors =

Answer 1

diff prefernces

Question 2

what can SH use div for

Answer 2

some use it as income to meet liabiltiies

others look for long term capital returns

Question 3

give an exmaple of diff in the type of div poicy a young and old investor may ahv

Answer 3

ension fund got to pay money to pensioners therfore looking for safe regular payment

young person invest loys in high growth copm - not waiting dor yearly small div repaymemnts but a big pay at teh end

Question 4

investors will choose/invest in plociies which

Answer 4

suit them

Question 5

what happens if you loved the dividend policy and the company changed it and this is what youo based invest on

and what is teh ipmact

Answer 5

invest in somewere else that suits your div ploicy needs

reduce value f share scasue people sell em off

Question 6

why may people not go for no div paying shares

Answer 6

dividends are more tax efficient than capital gins

Question 7

(both?) dividend polciies are based on teh assumption

Answer 7

dividends matter

Question 8

what is dividend policy 1

Answer 8

fixed percentage pay put ratio

Question 9

what is fixed percentage pay out ratio

Answer 9

no matter profit made - you pay x % yearly

sh fully aware - willni to accept volatility and fluctuation in div amounts

managers not punished unless tehy deliver ffixed % - so info asymmetry and signal don’t apply

• easy to operate
• clear message to investors
• dont consider cash constraints

Question 10

F%POR not suitable for copanies

Answer 10

w volatile profits

Question 11

what cant you learn about in fixed percentage pay out ratio

ad why

Answer 11

future of comp - based on div payment that has fixed %

as dont tell you how confident managers are as changes based on progitability

Question 12

what does FPPOR ignore

Answer 12

investment decisison

Question 13

how does FPP.. ignore investmen decision

Answer 13

1 yera may have lots of good I opps giving a higher return than capital gains

but got ot amke sure you pay the fixed % of profit b4 think ab using money for othr purposes

Question 14

what is zero div policy and what does it allow teh company to do

Answer 14

get 0 dividends

lets company reinvest all retained earnings

Question 15

what type of company is the zero divdend poolicy good for

Answer 15

new cmpany ir one requiring significant upfront investment

Question 16

whats dividend policy 2

Answer 16

constant dividend /constant growth dividend

Question 17

whats constant dividend policy

Answer 17

same div yearly or increases at fixed rate yearky

Question 18

does constant dividend/growth dividend have signalling

Answer 18

yah

Question 19

what type of company would beenfit from div policy 2

Answer 19

mature companies with stable earnings and dont got lots of investment opportunites s already big w spare chas

Question 20

startup dont want dividend to be a priority as we want to

Answer 20

reinvest

Question 21

failure to amke divided sends what type of signal to mkt

Answer 21

negative one

Question 22

what is a negative of div policy 2

Answer 22

limits opps for investment as dividends become 1st decision rather than resifual

Question 23

companies who use div ploicy 2 keep x x as to not dissapoint SH in a bad year

Answer 23

growth

very low

Question 24

what are hte alt to divididends

Answer 24

scrip dividend share repurchases
non cash benefits
special dividends

Question 25

scrip dividend

look at this befire the exam

Answer 25

pay dividend in form of stocks

allows copman retain cash

tax eficient for investor

Question 26

what is share repurchases

Answer 26

if the company unsure about investment opportunities

buy bak shares as this icreases value and increases earnings per share

Question 27

what signal does an announcement of shares repurchase send to mkt

Answer 27

+ve

Question 28

why does share repurchase send +ve signal to marekt

Answer 28

shows condence in future of firm

as nly buy if you thnk you buy cheap

shows managment think companies shares are undderated

so there is a prospect for share sto become more valuable

Question 29

whar are special dividends

Answer 29

simlar to normal shares

return surplus cash to sh as a one off payment

Question 30

non cash benefits - ho are htey onyl applicable to and give me an example

Answer 30

retail investors

gift vouchers
discount on services

Question 31

whats 2 key things about special dividends

Answer 31

got to label is as special div so dont confuse mkt

reutnr cash to investors where company got no +ve NPV projects to invest