Lecture 9: Payout Policy

Question 1

What are the two ways Firms can pay cash shareholders?

Answer 1

Firms can pay cash to shareholders in two major ways:

Cash dividends & Share repurchases.

Question 2

What is a stock dividend?

Answer 2

Stock Dividend/Split
Distributions of additional shares to a firm’s stockholders.

Question 3

What are the four stages of paying a dividend?

Answer 3

the four stages of paying a dividend:

1) Declaration Date: Date the firm announces a dividend payment (to be paid on a future date)

2) Ex-dividend date: Buyers of the stock on or after that date are not entitled to receive the most recently declared dividend

3) Record Date: Those investors registered in firm’s books, will ultimately receive the dividend

4) Payment Date: The actual distribution of dividend

Question 4

What are the four ways to do a stock repurchases?

Answer 4

Stock Repurchases:

Open-market repurchase: The firm announces that it plans to buy stock in the secondary market, just like any other investor.

Tender offer: The firm offers to buy back a stated number of shares at a fixed price. The deal is done if enough shareholders accept the offer.

Auction: The firm states a range of prices for repurchases, shareholders submit offers indicating the amount of shares they are willing to sell at each price. Then the firm decides the lowest price for repurchases.

Direct negotiation: The firm may negotiate repurchase of a block of shares from a major shareholder.

Question 5

Does the choice of payout policy matter to investors?

Answer 5

Does the choice of payout policy matter to investors?

For example, does it make a difference to investors if the firm pays dividend or repurchase shares?

According to Modigliani and Miller, investors’ wealth is not affected by the payout policy

Question 6

Why do some people belive dividend policy is relevant to investors?

Answer 6

Dividends send signals to investors

Information
asymmetries exist because managers know more about firm prospects than investors

A way to reduce the asymmetries and let investors know about firm prospects is through dividends as it is a communication channel between management and investors

The information content depends on:

direction of the dividend change;

positive change is perceived to signal good outlook while negative is perceived the opposite

difference between the actual dividend and the dividend expected by the market.