Session 2: Payout Policies

Question 1

Define Declaration Date

Answer 1

the date where the board of directors authorize the payment of a dividend

Question 2

Ex-dividend date

Answer 2

the date where the stock stops trading with the dividend

Question 3

Payable date

Answer 3

the date where the dividend is paid

Question 4

Special dividend

Answer 4

a one-time dividend payment which is usually larger than typical dividends

Question 5

Stock Dividend

Answer 5

when a company issues a dividend in shares of stock rather than cash to its shareholders

Question 6

Share Repurchases

Answer 6

Firm repurchases shares of its own outstanding stock

Question 7

Tender Offer

Answer 7

A public announcement of an offer to all existing security holders to buy back a specified amt of outstanding securities at a prespecified price over a prespecified period of time

Question 8

Targeted Repurchase

Answer 8

Firm repurchases shares from specific shareholder

Question 9

Open Market Repurchase

Answer 9

Firm repurchases shares in the open market

Question 10

Modigliani-Miller Dividend Policy Irrelevance

Answer 10

In perfect capital markets, the firm’s choice of dividend policy is irrelevant and doesn’t affect the initial share price

Question 11

According to MM, what determines payouts?

Answer 11

free cash flow

Question 12

Define the Catering Theory

Answer 12

firms adopt dividend policies based on changing of demand for dividends from investors over time

Question 13

Define dividend smoothing

Answer 13

consistent dividends

Question 14

Why is paying a dividend not desirable by firms?

Answer 14

The taxation of dividends and share repurchases makes it undesirable for a firm to raise funds to pay a dividend or repurchase shares

Question 15

Are dividends or share repurchased taxed at a higher rate?

Answer 15

Dividends

Question 16

What is the optimal dividend policy

Answer 16

The optimal dividend policy when the dividend tax rate exceeds the share repurchase tax rate is to pay no dividends at all

Question 17

Factors that make the effective dividend tax rate differ across investors?

Answer 17

• Type of investor
• Tax jurisdiction
• Income level
• Investment horizon

Question 18

Disequilibrium situation

Answer 18

where the proportion of supply and demand for dividends is not equal.

Question 19

Equilibrium situation

Answer 19

where the proportion of supply and demand for dividends is equal.

Question 20

What can help boost firm stock prices

Answer 20

Paying out excess cash through dividends or share repurchases can help boost firm stock prices by reducing managers ability and temptation to waste resources

Question 20

Dividend-Capture Theory

Answer 20

Absent transaction costs, investors can trade shares at the time of the dividend so that non-taxed investors receive the dividend

Question 21

Does the stock price increase or decrease when a stock dividend is offered and why?

Answer 21

The stock price will decrease with a stock dividend because the firm’s equity value is divided by a large number of outstanding shares

Question 22

What is the motivation for a stock split?

Answer 22

To keep the share price attractive to small investors

Question 23

When do reverse stock splits occur

Answer 23

when the stock price falls too low and the company wants to reduce the number of outstanding shares