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.