term 2 lecture 7 payout policy 1 Flashcards
what is payout policy?
the way a firm chooses between the alternative ways of distributing free cash flow to equity holders
what are some common empiracle observations about dividends??
what is the declaration date?
Declaration Date: The date on which the board of directors
authorizes the payment of a dividend. After the board
declares the dividend, the firm is legally obliged to make the
payment.
what is the record date?
Record Date: When a firm pays a dividend, only shareholders
of record on this date receive the dividend. Typically takes 2
business days for shares to be registered.
what is the ex dividend date?
Ex-dividend Date: A date, one business day prior to a
dividend’s record date, on or after which anyone buying the
stock will not be eligible for the dividend.
what is the payable date?
Payable Date (Distribution Date): A date, generally within a
month after the record date, on which a firm pays dividends
to its registered stockholders.
what is a special dividend?
Special Dividend: A one-time dividend payment a firm
makes, which is usually much larger than a regular dividend.
what is a stock split or a stock dividend?
Stock Split (Stock Dividend): When a company issues a
dividend in shares of stock rather than cash to its
shareholders
what is the return of capital?
Return of Capital: When a firm, instead of paying dividends
out of current earnings (or accumulated retained earnings),
pays dividends from other sources, such as paid-in-capital or
the liquidation of assets.
what is the liquidating dividend?
Liquidating Dividend: A return of capital to shareholders from a business operation that is being terminated.
what is a share repurchase?
an alternative way to pay cash to investors where the firm uses cash to buy shares of its own outstanding stock
what are the share repurchase mechanisms?
open market repurchase, tender offer, dutch auction, target repurchase
what is the open market repurchase mechanism?
what is the tender offer mechanism?
what is the dutch auction mechanism?
what is the targeted repurchase mechanism?
what is the assumptions of Modigliani-Miller’s model of dividend irrelevant?
how many periods are there within the dividend irrelevance MM model?
what is the formula relating the all equity firm value, value of equity capital and market cap?
what are sources and uses of funds in the MM model?
what is the formual for the current value of the firm in the dividend irrelevance MM model?
what is the implication of the current value of the firm in the dividend irrelevance?
current payout policy (d_t+1) does not affect the current value fo the firm
in a perfect capital market, what is the impact of a dividend on the share price?
in a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex dividend
in a perfect capital market, what is the impact on an open market share repurcahse on the stock price?
In perfect capital markets, an open market share repurchase has no effect on the stock price, and the
stock price is the same as the cum-dividend price, if a dividend were paid instead.
what is the trade off relating to dividends?
there is a tradeoff between current and future dividends, if they pay a higher current dividend, then future will be lower and vice versa
what is MM dividend irrelevance?
why in a perfect capital market, investors are indifferent between firms fund distribution mechanism?
by reinvesting dividends or selling shares, they can replicate either payout method on their own.
what determines the level of payouts that a firm can make to its investors?
the firms free cash flow.
in reality, capital markets are not perfect, what are the implications of this on the firms payouts policy?
what is the impact of taxes on dividends and capital gains?
shareholders must pay taxes on the dividends they receive. dividends are typically taxed at a higher rate than capital gains. even if the tax rates were the same the two methods are not equivalent: long term investors can defer the capital gains tax forever by not selling.
the higher tax rate on dividends make it undesirable for a firm to raise funds to pay a dividend. when dividends are taxed at a higher rate than capital gains, if a firm raises money by issuing shares and then gives that money back to shareholders as a dividend, shareholders are hurt because they will receive less than their initial investment
what occurs when the tax rate on dividends is greater than the tax rate on capital gains?
