Payout Policy Flashcards
1
Q
What two methods of payout policy exist?
A
- dividends
- share repurchases
2
Q
What is the dividend/payout policy irrelevance theory?
A
- in perfect capital markets investors are indifferent between the firm distributing funds via dividends or share repurchases
3
Q
What is a possible reason for the increase in share repurchases?
A
- share repurchases are more flexible
- managers at reluctant to make dividend changes that may need to be reversed
4
Q
What can an increase in dividends signal?
A
- company’s good fortune
- manager’s confidence
- lack of investment opportunities
5
Q
What does a dividend cut signal?
A
- investment into new profitable project
- appropriate action during adversity
6
Q
What signal does the announcement of share repurchases send?
A
- stock is undervalued, thus increasing their demand and raising price
7
Q
Describe the taxes involved on dividends and share repurchases
A
- shareholders must pay taxes on dividends they receive
- shareholders must pay capital gains taxes when they sell their shares
8
Q
When would an investor prefer share repurchases over dividends?
A
- when dividend taxes > capital gains tax
9
Q
Why are share repurchases preferred to dividends even when dividend taxes=capital gains taxes?
A
- the dividend tax has to be paid immediately
- capital gains tax only paid when stock is sold
- stock could be helped for many years before selling
- stock is likely to have already earned capital gains
10
Q
Describe the relationship between payout policy and the life cycle of the firm
A
- Mature firms - fewer investment opportunities-more cash-more pressure to give payout to avoid ‘agency cost of idle cash’
- Young firms - more investment opportunities-less cash-less pressure to give payout
11
Q
What is the agency cost of idle cash ?
A
- if a company has too much cash lying around shareholders may worry that managers will use cash for non-profitable investments
