The Role of the Senior Advisor & Ethics

Question 1

What is the formula for Total Shareholder Return?

Answer 1

TSR = (dividend per share + change in share price) / share price at start of year

Question 2

What are the three key areas for maximising shareholder wealth?

Answer 2

1. Investment Decisions
2. Financing Decisions
3. Dividend Decisions

Question 3

What are the 4 main reasons why profit is not a sufficient objective for maximising shareholder wealth?

Answer 3

1. Investors care about the future (Profit is a measure of the past)
2. Investors care about dividends
3. Investors care about financing plans (Debt vs. Equity)
4. Investors care about risk management

Question 4

What is the main aim of the investment decision?

Answer 4

To invest in attractive projects that are beneficial to the investor.
They can help a firm maintain strong future cash flows by the achievement of key corporate objectives.

Question 5

What is the main aim of the financing decision?

Answer 5

To minimise the cost of capital

Question 6

What are the practical issues that affects the financing decisions of a firm?

Answer 6

(LOSS)
Life Cycle
Operational Gearing
Stability of Revenue
Security

Question 7

What is the main aim of the dividend decision?

Answer 7

To determine whether to pay out a dividend or reinvest it into the company.

Question 8

How is Dividend Capacity calculated? (also known as free cash flows to equity)

Answer 8

Profits after interest, tax & preference dividends

Less

Debt Repayments, Investment in Assets

Plus

Depreciation & any capital raised through new share issues or debt

Question 9

What are the six main dividend policies?

Answer 9

1. Constant Payout Ratio
2. Stable Growth
3. Residual Policy
4. Scrip Dividends
5. Special Dividends
6. Share Buybacks

Question 10

What is a scrip dividend?

Answer 10

Where a company offers extra shares instead of cash.

Allows s/h’s the option of building their equity stake or taking cash.

Companies cash flows benefit from the cash saved where investors choose to take extra shares.

Question 11

What is an enhanced scrip dividend?

Answer 11

Where the company offers a generous amount of shares versus the cash dividend and so s/h’s are more likely to take the shares instead of cash.

Question 12

Are scrip dividends liquidity enhancing or liquidity reducing?

Answer 12

Liquidity Enhancing.

Question 13

What is a share buy back?

Answer 13

Where the company offers s/h’s the option to sell shares back to the company and give the s/h’s the cash.

The company is buying it’s shares back.

Question 14

Is a share buy back liquidity enhancing or liquidity reducing?

Answer 14

Liquidity reducing.

Question 15

What is a special dividend?

Answer 15

A special dividend is a cash payout far in excess of the dividend payments that are normally made.

Is more attractive than a share buy back if shares are perceived as being over valued by the market.

This impacts ALL shareholders

Question 16

What is the three step framework for developing ethical policies?

Answer 16

Step 1: Establish the issues
Step 2: Ensure Company fundamental ethical principles are understood by everyone (code of conduct in place)
Step 3: Introduce safeguards to reduce threats to an acceptable level.

Question 17

What is dividend irrelevance theory? (M&M)

Answer 17

In a tax free world, shareholders are indifferent between dividends and capital gains and so the value of a company is determined by the earning power of its assets and investments.

It ignores the impact of tax and the practical difficulty of raising finance.