Lecture 9 Flashcards
Cash dividend
- Where a firm may pay regular cash to stockholders
- Paying cash dividends reduces the corp cash and retained earnings
Stock Dividend
- Where a firm pays out shares rather than cash
- Paying out stocks increases the number of shares while redcusing the value of each share in the market
Stock Split
- Increases the number of shares outstanding while reducing the value of each share
- Three for one stock split means one 90p share now becomes 3 x 30p shares
Declaration date
The date a future payment of dividends is calculated
Date of record
The date the corporation prepares a list of individual investors believed to be shareholders
Ex-dividend date
Normally 3 business days before the date of record, shareholders are entitled to receive the next dividend if they bought shares before the ex-dividend date
Date of payment
The date the dividends are actually paid out
Pros of firms paying dividends
- Appeal to investors that seek stable cash flow but do not want transaction costs
- Managers can pay dividends in order to keep cash from bondholders
- Managers could increase dividends to signal their optimism concerning future cash flow
Cons of paying dividends
- Dividends are taxed as ordinary income
- Dividends can reduce internal sources of financing
- Once established, dividend cuts ar hard to make
Share repurchase
Refers to a firm using its cash to repurchase share of its own equity
3 Types of share repurchase
- Open market purchases which is the same as investors
- tender offer - buy a fixed amount at a higher market price
- targeted repurchase - buy shares from a specific shareholder
Clientele Effect
All dividends are taxable while capital gains are not in an imperfect market. The pay-out policies of a firm can reflect the tax preference of its investors.
