Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Corporate Financial Decision Making > Payout Policy > Flashcards

Payout Policy Flashcards

1
Q

In what form does a didvidend come in typically?

A

Cash

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Is the level of dividend fixed?

A

No its not but the market doesn’t react well erratic dividend changes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

For what reason may there be dividend restrictions?

A

To protect creditors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What types of dividends do companies distinguish between?

A

Regular and special dividends. Regular is the expected dividend. Special is any extra on top of the expected attached to the dividend payout

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are some measures of dividends?

A

Dividend Per Share, Dividend Yield, Dividend Payout Ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

How do you calculate dividend per share?

A

Total dividend payout / #Shares

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

How do you calculate dividend yield?

A

DPS / Shareprice

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

How do you calculate dividend payout ratio?

A

DPS / Earnings per share

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

In what form do dividends usually come in Australia?

A

Cash

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What comes usually with a dividend annoucement?

A

A profit announcement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Under what conditions can you payout dividends?

A
  • Assest must exceed liabilities before dividend declared and excess sufficient to pay div
  • Payment of dividend is fair and reasonable to all shareholders
  • Payment doesn’t materially pejudice the ability to pay creditors at a firm
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are franking credits?

A

A credit that allows the company to pass on tax already paid on the dividends onto shareholders. No double taxation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the dividend payment process?

A
  • Announcement date
  • Cum-div date
  • Ex-div date
  • Record date
  • Payment date
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the annoucement date?

A

The date the dividend is announced

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the cum-dividend date?

A

The last date you can buy a share and the dividend still be paid out to you

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the ex-dividend date?

A

The first date you can buy the share and not recieve the dividend

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is the record date?

A

All shareholders that have held their shares since before the cum-dividend date are recorded ready for payment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is the payment date?

A

The date at which the dividends are paid out

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is the equation for the drop off-ratio?

A

(P(cum)-P(ex))/Div where P(cum) is the price cum dividend, P(ex) is the price ex dividend and Div is the dividend

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What are the cashflows for selling cum-dividend?

A

P(cum) - (P(cum)-P) x t(cg) where P(cum) is price cum dividend, P is the price at which the share was bought at and t(cg) is the tax on capital gains

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What are the cashflows for selling ex-dividend?

A

P(ex) - (P(ex)-P) x t(cg) + Div (1 - t(d)) where P(ex) is the price ex-dividend, P is the price at which the share was bought at, t(cg) is the tax on capital gains, Div is the dividend paid out, t(d) is the tax on dividends

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

For the market to be stable, what equation do we require to be true?

A

( P(cum) - P(ex) ) / Div = ( 1 - t(d) ) / ( 1 - t(cg) )

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

When the tax on capital gains is the same as the tax on dividends, what behaviour do we expect on the ex-dividend date?

A

Price change = dividends

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

When the tax on capital gains is less than the tax on dividends, what behaviour do we expect on the ex-dividend date?

A

Price change < dividends

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

When the tax on capital gains is greater than the tax on dividends, what behaviour do we expect on the ex-dividend date?

A

Price change > dividends

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What does Modgliani-Miller Irrelevance Theorm say about payout policy?

A

Payout policy doesn’t affect firm value so if a firm pays out dividends or not is irrelevant

27
Q

What assumptions does MM make?

A
  • No difference to investors between dividends and capital gains
  • If company pays too much cash, it can issue more equity with no floatation or signalling consequences
  • Companies paying very little dividends are not investing in bad projects or aquisitions
28
Q

What does the MM irrelevance theorm imply?

A
  • If investment plan doesn’t change, neither can the value of the firm regardless of dividends
  • Dividend payout is a 0 NPV transaction
  • In perfect markets, investors can make their own dividends by selling part of their holdings
  • In perfect markets, investors who dont want dividends can just buy shares with their dividend
29
Q

What factors affect dividend policy?

A
  • Resolution of uncertainty
  • Issue and transaction costs
  • Infomation asymmetry and signalling
  • Agency costs
  • Tax implications
30
Q

What is resolution of uncertainty mean in relation with payout policy?

A

Investors prefer dividends rather than capital gains becaue of the inherent uncertainty associated with capital gains. Can be resolved by selling shares now however

31
Q

Why does issue and transaction costs affect payout policy?

A

Paying more dividends implies a need to raise capital more frequently. This incurs direct and indirect costs associated with flotation. Higher issue costs will lower the expected level of dividends

32
Q

What does infomation asymmetry mean in relation with payout policy?

A

Managers have more infomation than shareholders. Dividends can signal to the market what is going on internally with the firm so how dividends are paid out affect how a firm is percieved by the market

33
Q

What does a dividend increase signal?

A

It signals that the firm has good cashflow prospects. Usually only increased when the increase is sustainable

34
Q

What does a dividend decrease signal?

A

It gives a very negatuive signal and should be avoided at all costs

35
Q

Why do agency costs affect payout policy?

A

Excess cash gives managers too many resources and allows them to potentially over invest. Paying higher dividends restricts funds and and forces managers to invest more carefully. This disciplines managers and allows shareholders to observe managerial behaviour

36
Q

Why tax is important in dividend policy?

A

If tax for capital gains different to tax of dividends one or the other is prefered and will thus affect which firms a shareholder will invest in. This will in turn affect how a firm pays out

37
Q

What is a imputational tax system?

A

Some or all of all the tax paid by the company may be attributed to shareholders to reduce the tax payable on a distribution e.g. dividends

38
Q

What is the grossed up dividend equation?

A

Div(cash) / ( 1 - t(c) ) where Div(cash) is the cash amount of the dividend and t(c) is the corporate tax rate

39
Q

What is the franking credits equation?

A

t(c) x Div(grossed-up) where Div(grossed-up) is the grossed up dividend and t(c) is the corporate tax rate

40
Q

How long must you hold capital gains in order to get reduced tax and how much is it reduced by?

A

If the share was held for more that 12 months you get 1/2 the gains tax free and the other half is taxed at the personal marginal rate

41
Q

In Australia, if the personal tax rate is less than the corporate tax rate do shareholders prefer capital gains or dividends?

A

Shareholders prefer dividends as they recieve returns on dividends but get taxed on capital gains

42
Q

In Australia, if the personal tax rate is greater than the corporate tax rate do shareholders prefere capital gains or dividends

A

Shareholders with relatively low personal tax rates may prefer dividends but majority will prefer capital gains as long as they can delay their gains until the personal tax rate falls or until they surpass the 12 months required to get reduced capital gains tax

43
Q

Can non-residents take advantage of franking credits?

A

No but they may be able to have some recognition of the tax paid in Australia

44
Q

How can a company still make high dividend payouts without fluctuating dividends and reduced cash available to the firm?

A

Special dividends and dividend reinvestment plans

45
Q

What are special dividends?

A

Special dividends are a part of a dividend payout said to be non-recurring and is extra ontop of the regular dividend payout

46
Q

Waht is a dividend reinvestment plan?

A

DRP’s are a way that shareholders can instead of being paid out a cash dividend can instead reinvest their dividend by purchasing shares at a dicoiunt with no transaction costs

47
Q

What is a share buyback?

A

Buying back shares from shareholders. Legally this can only buyback less than 10% of shares in a 12 month period

48
Q

Types of buybacks?

A
  • Equal access buyback
  • Selective buyback
  • On-market buyback
  • Employee share buyback
49
Q

What factors change how the buyback is treated tax wise?

A

If the buyback is on-market or off-market

50
Q

How are on-market buybacks treated tax wise?

A

Only subject to capital gains tax

51
Q

How are off-market buybacks treated tax wise?

A

Difference between price and capital component treated as a dividend and can be franked

52
Q

What is Tax Determination TD 2004/22?

A

Reduction buyback discount on capital loss claimed by shareholders. Calculate tax liability with reference to deemed consideration which calculates the capital component by VWAP x ( 1 + market index change % ) - Div in buyback

53
Q

What are the reason that a firm buyback shares?

A
  • Improved performance measures
  • Signalling and undervaluation
  • Financial flexibility
  • Employee share options
54
Q

Why do share buyback improve performance measures?

A

EPS is a common performance measure and repurchasing shares reduces the # shares and thus increases the EPS. Can’t buyback all the shares as firms need all the cash and investors aren’t fooled by huge buybacks

55
Q

What signal does a buyback send to the market?

A

Buying back a stock indicates to the market their share is undervalued and is usually accompanied by some news of selling an unprofitable project/asset. Response to a buyback similar to that of a dividend payout

56
Q

How does a buyback give financial flexibility?

A

Since dividend payout changes aren’t appreciated by a market, buybacks allow an alternative way to make distributions that may not be permanent

57
Q

Why do employee share options affect if a company repurchases or not?

A

Buybacks increase the shareprice to the holders of an option so may be beneficial for a manager to buyback shares

58
Q

What types of firms payout dividends consistently?

A

Firms with higher permamnent, operating cashflows payout more dividends generally

59
Q

What types of firms payout repurchase consistently?

A

Firms with higher temporary, non-operating cashflows repurchase shares more generally. They also have more volitile cashflows and distributions

60
Q

What will a firm do following bad performance?

A

A firm will generally buyback shares

61
Q

What will a firm do following good performance?

A

A firm will increase dividend payout given that the increase is sustainable or payout a special dividend

62
Q

When do managers favour off-market buybacks?

A

When they want to distribute franking credits when the buyback is larger and firm is generating more cashflows

63
Q

When do managers prefer on-market buybacks?

A

When the firm is considered undervalued by the manager

Corporate Financial Decision Making (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions