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Corporate Finance > Payout Policy > Flashcards

Payout Policy Flashcards

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1
Q

Payout Policy

A

Payout policy refers to all cash distributions made by the firm to its shareholders:

Dividends: distribution of cash (or stock) to its shareholders, in proportion to their number of shares
Share repurchases: the firm buys stocks from shareholders

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2
Q

Paying out dividends: timeline

A

1) Declaration date
2) Cum-dividend date
3) Ex-dividend date
4) Record date
5) Payment date

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3
Q

Declaration date

A
  • Announcement of next dividend, record and payment date
  • Firm is legally obliged to make the payment
  • “Market reaction date”
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4
Q

Cum-dividend date

A
  • Last day when shares are traded with the right to receive the dividend
  • Usually 3 days before the record date
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5
Q

Ex-dividend date

A
  • Day after cum-dividend date
  • Shareholders buying shares on or after this date do not receive dividend
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6
Q

Record date

A
  • Company records shareholders who are entitled to receive a dividend
  • No price change on this date
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7
Q

Payment date

A
  • Dividend checks are mailed out
  • 2-4 weeks after record date
  • No price change on this date
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8
Q

Stock dividend

A

Dividends are “paid out” as additional stock. This increases the number of shares outstanding, reducing the share price

“Paid in kind”

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9
Q

Cash dividend

A

Regular dividend:
Paid in regular intervals –> expected to be maintained in the future

Special dividend:
Paid irregularly, e.g. as part of particularrly good operating year

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10
Q

Dividend per Share (DPS)

A

Dollar amount per Share

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11
Q

Dividend Yield

A

DPS / Share Pirce

Expected return on stock = dividend yield + price appreciation

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12
Q

Dividend Payout ratio

A

Dividend paid as a percentage of the net income of the firm

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13
Q

Retention Ratio

A

RR = 1 - Dividend Payout Ratio

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14
Q

Share repurchases / stock buybacks

A
  • Kept in the firm’s treasury (treasury shares)
  • May be resold
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15
Q

Stock buybacks & elimination of shares

A

The number of shares outstanding reduces –> firm equity is reduced

ATTENTION: Market value repurchase vs. book value reduction

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16
Q

Methods to buyback shares

A
  • Repurchase tender offer
  • Open market repurchases
  • Privately negotiated repurchase
17
Q

Repurchase tender offer

Methods to buyback shares

A
  • Prespecified price and number of shares to be repurchased
  • Validity period
  • Stockholders can submit tenders
  • Usually used for large buyback programmes
18
Q

Open market repurchase

Methods to buyback shares

A
  • Firms make announcement and by back in the market at preveiling conditions
  • Can be used to “steer” financing mix over long period
19
Q

Privately negotiated repurchase

Methods to buyback shares

A
  • Usually only used with large stockholders
  • Potential means to eliminate “activist” stockholders or (re)consolidate firm control
20
Q

Stock buybacks > dividends

A
  • More flexibility (timing - not lump-sum payment, tractability, reversal through SEO)
  • Control management (eliminate shareholders or increase inside ownership)
  • Stock stabilization (to support stock - market making)
  • Value extraction (undervalued shares)
21
Q

Pension funds

Taxes

A
  • Usually tax-exempt to encourage retirement savings
  • Inidivduals are only taxed once they receive pensions
22
Q

Mutual funds

Taxes

A

Not taxes directly, but taxed at personal level with corresponding marginal tax rate, once the individual receives dividend.

23
Q

Corporations

Taxes

A
  • Corporations are protected from taxes, depending on ownership stake
  • Intention to avoid double taxation –> individuals are taxed
24
Q

Tax Clientele Effect

A
  • Clustering of similar stockholders
  • Firms with high payout ratios attract institutional investors
  • Stockholders in high tax brackets select investments in firms with low payout ratios
25
Q

Signalling effect of dividends

A
  • Signal to convey “real positive” (cannot be easily imitated) information to the market
  • Increasing dividends is viewed as a powerful signal (stickiness indicates long-term commitment)

carry stronger weight than stock repurchases as long-term, no reversal

26
Q

Stock split

A
  • Increase the number of shares outstanding by reducing its nominal value
  • No new shares being issued
  • No money ever changes hand
  • Increases liquidity in the market
27
Q

Paying dividends und MM

A

A firm’s total market value is independent of its dividend policy if markets are perfect

  • The value of the firm only depends on fundamentals
  • The payout policy is completely irrelevant
  • Investors can create any payout stream through perfect financial markets (undo cash distributions/”in kind” distribution or home-making dividends)

Corporate Finance (6 decks)

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