Session 2: Payout Policies Flashcards
Define Declaration Date
the date where the board of directors authorize the payment of a dividend
Ex-dividend date
the date where the stock stops trading with the dividend
Payable date
the date where the dividend is paid
Special dividend
a one-time dividend payment which is usually larger than typical dividends
Stock Dividend
when a company issues a dividend in shares of stock rather than cash to its shareholders
Share Repurchases
Firm repurchases shares of its own outstanding stock
Tender Offer
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
Targeted Repurchase
Firm repurchases shares from specific shareholder
Open Market Repurchase
Firm repurchases shares in the open market
Modigliani-Miller Dividend Policy Irrelevance
In perfect capital markets, the firm’s choice of dividend policy is irrelevant and doesn’t affect the initial share price
According to MM, what determines payouts?
free cash flow
Define the Catering Theory
firms adopt dividend policies based on changing of demand for dividends from investors over time
Define dividend smoothing
consistent dividends
Why is paying a dividend not desirable by firms?
The taxation of dividends and share repurchases makes it undesirable for a firm to raise funds to pay a dividend or repurchase shares
Are dividends or share repurchased taxed at a higher rate?
Dividends
What is the optimal dividend policy
The optimal dividend policy when the dividend tax rate exceeds the share repurchase tax rate is to pay no dividends at all
Factors that make the effective dividend tax rate differ across investors?
- Type of investor
- Tax jurisdiction
- Income level
- Investment horizon
Disequilibrium situation
where the proportion of supply and demand for dividends is not equal.
Equilibrium situation
where the proportion of supply and demand for dividends is equal.
What can help boost firm stock prices
Paying out excess cash through dividends or share repurchases can help boost firm stock prices by reducing managers ability and temptation to waste resources
Dividend-Capture Theory
Absent transaction costs, investors can trade shares at the time of the dividend so that non-taxed investors receive the dividend
Does the stock price increase or decrease when a stock dividend is offered and why?
The stock price will decrease with a stock dividend because the firm’s equity value is divided by a large number of outstanding shares
What is the motivation for a stock split?
To keep the share price attractive to small investors
When do reverse stock splits occur
when the stock price falls too low and the company wants to reduce the number of outstanding shares
