finance lec 8 - clientele effect and div policies Flashcards
diff investors =
diff prefernces
what can SH use div for
some use it as income to meet liabiltiies
others look for long term capital returns
give an exmaple of diff in the type of div poicy a young and old investor may ahv
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
investors will choose/invest in plociies which
suit them
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
invest in somewere else that suits your div ploicy needs
reduce value f share scasue people sell em off
why may people not go for no div paying shares
dividends are more tax efficient than capital gins
(both?) dividend polciies are based on teh assumption
dividends matter
what is dividend policy 1
fixed percentage pay put ratio
what is fixed percentage pay out ratio
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
F%POR not suitable for copanies
w volatile profits
what cant you learn about in fixed percentage pay out ratio
ad why
future of comp - based on div payment that has fixed %
as dont tell you how confident managers are as changes based on progitability
what does FPPOR ignore
investment decisison
how does FPP.. ignore investmen decision
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
what is zero div policy and what does it allow teh company to do
get 0 dividends
lets company reinvest all retained earnings
what type of company is the zero divdend poolicy good for
new cmpany ir one requiring significant upfront investment
whats dividend policy 2
constant dividend /constant growth dividend
whats constant dividend policy
same div yearly or increases at fixed rate yearky
does constant dividend/growth dividend have signalling
yah
what type of company would beenfit from div policy 2
mature companies with stable earnings and dont got lots of investment opportunites s already big w spare chas
startup dont want dividend to be a priority as we want to
reinvest
failure to amke divided sends what type of signal to mkt
negative one
what is a negative of div policy 2
limits opps for investment as dividends become 1st decision rather than resifual
companies who use div ploicy 2 keep x x as to not dissapoint SH in a bad year
growth
very low
what are hte alt to divididends
scrip dividend share repurchases
non cash benefits
special dividends
scrip dividend
look at this befire the exam
pay dividend in form of stocks
allows copman retain cash
tax eficient for investor
what is share repurchases
if the company unsure about investment opportunities
buy bak shares as this icreases value and increases earnings per share
what signal does an announcement of shares repurchase send to mkt
+ve
why does share repurchase send +ve signal to marekt
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
whar are special dividends
simlar to normal shares
return surplus cash to sh as a one off payment
non cash benefits - ho are htey onyl applicable to and give me an example
retail investors
gift vouchers
discount on services
whats 2 key things about special dividends
got to label is as special div so dont confuse mkt
reutnr cash to investors where company got no +ve NPV projects to invest
