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Year 1 - Accounting and Finance > finance - lec 8 - dividend policy > Flashcards

finance - lec 8 - dividend policy Flashcards

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1
Q

dividend

A

cash payment to SH as reward for investment

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2
Q

what is totla return of a dividend

and what is it similar to

A

div income + capital gain

(similar to total yield)

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3
Q

how do SH gain and add value

A

dividend payment- recieve dividend income

capital gain - maagment do something t hat icnreases value of teh share .

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4
Q

dividends only distriubted after

A

after tax profit

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5
Q

company needs to make what after paying what in order to pay dividends

A

profit after paying interest and tax

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6
Q

no net profit =

A

no divs

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7
Q

the dividend policy doesn’t impact what and why is it a benefit

A

impact profit figure for the company

so you can still copare by looking at profit for the year

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8
Q

sh dont have control over

A

dividend policy

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9
Q

sh dont got control over dividend policy but how can t hey ‘impact div policy

A

if dont like proposal @ AGM they can vote it down and maangment may reconsider

cant propose their own

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10
Q

dividends are reccomendedd by who and approved by who

A

directors

SH at AGM

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11
Q

What gives value to financial instruments

A

entitlement to future cashflow

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12
Q

your entitleent to dividendt pahment depends on whn

A

you bought stock

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13
Q

when company pay dividends theyve ot to make an announcement and identify ….. before

A

eligible SH b4 payment is due

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14
Q

if i want to pay div on 30th april why i can tkeep it opentill 29th

A

got new wave of sh all of a sudden

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15
Q

what is xd/ex div date

A

date dividend must be paid to those holdingg shares

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16
Q

after xd/ex div date what happens

A

mkt revise valuation of stick

and stock price decreases by the amount of dividend

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17
Q

what does cum div mean

A

price of share between announcement and ex div date

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18
Q

why does share price fall on the ex div date

A

SH who buy immediatley after the xd date dont hae a right to recieve the dividend

is this the doing of teh company ?

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19
Q

for practical purposees when do managment draw line on who can buy shsres

A

2-3 weeks b4 the payment

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20
Q

Sh own company but managment run company on SH behalf

whats primary obj of managment(3 things)

A

serve sh interest

max sh wealh

max company value/sahre price

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21
Q

how do managment maximise copmany value/shre price

or better still whats the dilemma

A

w leftover money do we pay dividends or reinvest in positive NP (pay something but project returns you more) - this lets company become more valuable and increase share

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22
Q

serving SH interest is not any easy decision what s the main descison /consideration of amgnamget

A

what extent do they use net profit to make sh happy an d what extent do tehy use money to reinvest

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23
Q

how do we measure dividends for one company

A

dividend per share

also what is DGM

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24
Q

how do we measure dividends for multiple companies

A

dividend yield - a relative measure and it gives a % we can use to compare companies

DPS(dividend per share)/Share price

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25
Q

what does a dividend yield of 15 % tell us

A

only 15% of teh value of shares comes from dividend patment

majority comes from inherent value pf company i.e the positive investments they have made

summary - shows us how much value is based on dividend and how much comes from +Ve investment activities

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26
Q

if company dont pay dividend and shares and is valuable where does valu come frm

A

future profitablity

e.g amaxon and google dont want people to invest based on income but would rather want people to trust them to icnrease vlue fo share

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27
Q

what is a divideend decission 2 parts

A

consideration of hwo much copany should retain to reinvest in the company and how much it shoudl distribute to SH

if copany got +Ve NPV prokect in whic to I money shoul they retain funds rather than having to rasie funds externally

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28
Q

how much a dividedn can be is affected by what 3 factoes

A

internal

external

legality

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29
Q

according to teh copanies act dividends can only eb paid out of

A

distributable profits

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30
Q

give exmaple fo company can only sell dividends through distributable profits

A

buy land the alue now x100 and profit is now bigger due to the revaluation of assets

but unless you sell asset and get money it is not a redistributable profit

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31
Q

accoutnign profit not equal to

A

distributable profit

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32
Q

lenders may put x on dividend paymetn

A

constraints

33
Q

constraints are more common for what size business

A

small / meidum

34
Q

give example explanatio of restricitve constraints

A

in % , relative or absolute terms

cannot pay dividends to sh for x years
max you allowed to pay regardless of profit figure is x or 15% of profit

35
Q

why do lenders impose restrictions

A

to ensure money remains in bs

bs is profitabl

and abiltiy that it is guaranted to pay loan abck to leder

36
Q

if you dont hae vash in bank cant …

A

pay divided

37
Q

not all profitable companies are

A

vcahs rich

38
Q

with invstment opps what is a major SOF

A

retained earnings

39
Q

if you got lots of +Ve NPV opps and dont got much choice for at use of moeny which is pay DIV what wil you finfanceit by

A

spedning lots of cash

40
Q

divided irrelevance

A
41
Q

whats the argument in dividend irrerlevance

A

some think its irrelevant some think its not

42
Q

who made dividend irrelevance

A

modigliani and miller

43
Q

what did modigliani and miller argue - first theory- value of company

A

value of the company comes from its assets ,chane to asset value e.g. +ve investment in NPV project means assets becmore more baluable

so only way for company value to chhange is if they invest/sell assets

44
Q

what is the key divident arguemnt/point in MM theory 1

A

if pay dividend - concerning SH - it don’t impact value

SH are indifferent between dividend income and capital gain - dont care whether wealth is in either as long as it is increasing by one way or the other

45
Q

use an exmapkle to ilustrate the MM div thoery/argyment

A

sh got 1 milly in shares company gets 100k to pay as div or invest/borrow against an asset

if they pay as dividend asset avlue decreasse by 100k

if they borrow against asset liablity increasess by 100k so bet value decreases

so i f dont pay div total wealth is 1milly

ig they pay div total wealth in comp worth 900k + recieve 100k in div

so whether get div income or a an increase in alue of share got 1milly either way so val of company as far as SH concerned wdont change anyhing as total wealth stays the same

46
Q

even if sh want a div payment and company dont pay what can they do

A

manufacture own dividend

47
Q

how can sh manufacture own dividend

A

hold 1 milly in amazon wanna recieve 10% of investment value

sell 10% of shares yearly =
amazon paying 10% div every year to ya
or
sell 10% amazon shares over the next year the profit not given as dividends will be used to increase the value of the company then sell another 10%

48
Q

conclude/summarise the dividend policy point

A

if div policy changes value 1-1 , what you loose in share value you gain in dividend income - they cancel each other out

as far as SH concerned there’s been no change in wealth there wealth remain the same

dividend policy got no impact on company valuation

sh dont care where wealth is coming from

49
Q

SH dont care where wealth is coming from what does this mean we should use

A

optimal investment pilkcuy

50
Q

what is optimal investment policy

A

invest in all projects w positive NPV

Surplusfunds (as on positive NPV projects left) can be paid out as dividends

dividends are a residual decision

51
Q

in the optitmal invesmtent strategy why do we use all capital for +ve NPV investment- only way for

A

company to add value

52
Q

why is dividends a residual decision i.e. what is the priority

A

investing and capital gain is the priority

53
Q

who cam eup w dividend relevance theory

A

litner and gordon

54
Q

waht is litner and gordon relevance theory 4 points

A

dividends are preferred due to theri certianty

current dividends prvide a reliable return-future profits are less atttractive( is this due to the time value of money

this suggests dividend policy is relevant to markt value as investors will value copmanies that pay dividends out more highly

55
Q

dividend relevance theory questions the assumption that sh are

A

indiffernet between div income and captial gain

56
Q

in terms of dividend relevance what does empirical evidence suggest

A

sh prefer div income

  • when announced div are gonna be paid , it is liekly to be honourred so you almost certain

wheras capital gain are flucruaory affected by factors some of which yu can’t prefict so control

+ bettter to recieved money in dividends tax wise

57
Q

in the releance theor what has impact on copany valuation

A

DIVIDEND POLICY

58
Q

DIVIDEND GROWTH MODEL

A
59
Q

market value of the company =

A

present value of future dividends

60
Q

the higher the dividend payment

A

the greater the market value

61
Q

formaula for value of share

A

D1/(r-g)

62
Q

what should we view the formula for the value of share for and what shooldne we view it for and why

A

vew it as relationship btwn future div and growth rate

dont use it as formula to prove ir/relevance div policy cuz then amaxon and google worth 0 as tehy dont have D1

63
Q

What is D1

A

What you don’t currently pay to SH,

D1 is D0 x 1+g

64
Q

if you dont make any div payments now there is no

A

D1

65
Q

duture of div patmens all based on … therefore if comp dont pay what happens to g

A

based on growth rate

if comp dont pay div the growth increases

66
Q

if D x 2 what happens to value of share

A

increases

67
Q

if g goes up what happens to (r-g) and what happens to share value

A

becomes smaller

denominator reduces therefore share value increases

so value of amazon/google comes from G not d 1

68
Q

dividend as a signal

A
69
Q

what is asymmetry of info

A

managers and directors of comp know more about prospects/company than SH - almost know nish

managers only announce or increase div if they confident and think they can upkeep it in the future - severe consequences for div cuts and wrong info as SH don’t liek div cuts - c

70
Q

strong dividends are seen as

A

good news

71
Q

why strong div seen as good news

A

know managers dont want to make mistaje

72
Q

strong dividends increase ….

A

value pf firm / share

73
Q

strong div increase value of firm/sahre so and son on dividend annoucnement date we see

A

an icnrease in share price

74
Q

an increase in share price is percieved in the market as a goog signal about teh company why

A

cause maanger know everything + hesitatnt o lie

75
Q

when does whole asymmetry of info disapear

A

0 condequences for lyin/bad performance/managment

76
Q

if a company is considering cutting dividneds what do they ahve to do and why

A

explain clearly why taken this action

so dont confuse the market

77
Q
A
78
Q
A

Year 1 - Accounting and Finance (49 decks)

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