Payout Policy Flashcards
What is payout policy?
Payout policy refers to the activities that corporations undertake to return cash to their shareholders. Managers have to decide on how much cash they are paying back (if at all) and how they are paying it back.
What are dividends?
Dividends are a distribution of a fixed amount per share of a proportion of corporate profits. Managers strive to maintain regular flow, dividends are rarely cut back. Managers don’t increase dividends unless confident that higher level can be maintained in the long run.
True or false: dividends are frequently cut back
false
true or false: managers don’t increase dividends unless confident that higher level can be maintained in the long run
true
What is stock repurchase?
Stock repurchase happens when the corporation buys back some of its outstanding shares.
What are the advantages of stock repurchase?
They’re more flexible and they have tax advantages.
What are the types of cash dividends?
regular cash dividend and special cash dividend
What are the types of stock repurchase?
open market, fixed-price tender, dutch auction and selective buyback
What are cash dividends?
Payment of cash by the firm to its shareholders.
In what time frames can cash dividends be paid?
annual, semi-annual and quarterly
Why is the choice of cash dividends sometimes constrained?
In some countries firms are forced to pay dividends and covenants can restrict dividend amounts to project creditors.
True or false: All dividends involve cash payments.
False, there is no cash payout in a stock dividend.
What happens in stock dividends?
In stock dividends, firm distribute additional shares to shareholders (a 5% stock dividend means that the firm will send extra five shares to each shareholder for every 100 shares currently owned).
What happens in stock splits?
In stock splits, firms distribute additional shares to shareholders (2-for-1 stock split means that shareholders will receive one new share for every old share owned before the split)
What are the differences between stock splits and stock dividends?
Stock splits tend to be much larger than stock dividends and accounting treatment is different.
What are the 5 important dates regarding dividends?
1) announcement date (firm states dividend policy)
2) cum-dividend date (day before the ex-dividend day)
3) ex-dividend date (first day that the stock trades without being entitled to dividend)
4) record date (stock owner is entitled to the dividend)
5) payment dare (dividends are transferred to the shareholders’ accounts)
Where are the stocks repurchased kept?
They’re kept in the company’s treasury to be resold in the future.
True or false: Stock repurchase is a one-off event instead of regular.
True
True or false: Stock repurchase has been banned in some countries.
True
Under which assumptions have Modigliani and Miller showed that the value of the firm and the wealth of shareholders don’t change with changes in the payout policy?
1) investment policy is held constant
2) no transaction costs
3) capital markets are efficient
4) managers maximise shareholders’ wealth
5) no difference in the tax treatment (at corporate and personal levels)
How can a dividend pattern be sustained?
By adjusting accordingly the number of shares outstanding.
Why is dividend policy irrelevant in theory?
Since investors don’t need dividends to convert shares into cash, they won’t pay higher prices for firms with higher dividend payouts. Old shareholders can instead sell shares and keep the same wealth.
True or false: dividend policy should have no impact on firm value.
True
What is the main difference that happens between the dividend and share buyback cases?
The result share price, which is usually higher in stock repurchase.
True or false: Managers would rather decrease dividends than borrow money.
False, managers are reluctant to reverse dividend decisions.
Why do managers “smoothen” dividends?
To avoid the risk of reduction. An increase in dividends follows a sustainable long-run increase in earnings.
Do managers focus more on the level of dividends or the change in dividends?
Managers focus on “change” in dividends rather than the actual levels. The perceived impact of paying a $1 dividend this year depends on how high the dividend was last year.
Why do managers and markets act if the dividend policy is relevant?
Because the assumption of Modigliani and Miller’s payout policy irrelevance don’t hold in real life, specifically the symmetry of taxation and symmetry of information.
Which is typically taxed at a higher rate: dividends or repurchases?
Dividends
Why is it that when taxes are present raising money by issuing shares and paying the amount raised as dividends is no longer irrelevant?
Because dividends are typically taxed at a higher rate.
True or false: given that dividends are consistently taxed more heavily than capital gains, taxpaying investors should welcome a decrease in dividends and the value of the firm more favourably.
False. Although logically we can expect that, the expected decrease in the price of a stock after a dividend announcement is in direct contradiction with the empirical evidence from Asquith and Mullins’ event study: we observe instead a clear upward jump in prices upon announcement of a dividend payment, which goes completely against our expectations.
Consider an investor who buys a stock just before it goes ex-dividend and sells it right after. Does the share price drop by less than the dividend amount if the tax on capital gains is lower than the tax on dividends?
While it makes sense to think so, share prices tend to fall by the exact dividend amount.
What does the inconsistency that if an investor who buys a stock just before it goes ex-dividend and sells it right after the share prices tend to fall by the exact dividend amount indicate?
That there are different categories of investors trading the stock close to dividend dates. Different classes of investors are not exposed to taxes in the same way (e.g. individual vs institutional investors).
Besides taxes, what is the other assumption that isn’t held in the real world?
Capital markets are not necessarily efficient. There is information asymmetry between market participants. Managers know more about the firm than outsiders do. changes in dividends can and do affect the market’s perception of the firm’s value.
An increase in a firm’s dividends could be due to:
either the management’s confidence about the future affordability of a higher dividend (positive signal) or a lack of foreseeable investment opportunities (negative signal)
formula para value da firm
V = E + D
novo numero de shares se houver new share issuance
n1 = n0 + Δn
novo numero de shares se houver share repurchase
n1 = n0 - Δn
True or false: when you issue debt and use the proceeds to repurchase stock, the price of the shares doens’t change
True
