Topic 9- Dividend and Payout Policy Flashcards
What are the 2 main types of payout policies?
- Dividends
- Stock repurchases
What are the 3 main types of dividends?
- Cash dividend
- Stock dividend
- Stock split
Describe a cash dividend and its 2 possible forms
Payment of cash by the firm to its shareholders. It can pay regular dividends or on occasion give out special dividends
Describe a stock dividend
Distributions of additional shares to a firm’s stockholders
Describe stock splits
Issue of additional shares to firm’s stockholders
What happens to a firm’s value after dividends are paid?
After dividends are paid, a firm’s value falls- as does it’s stock price as a result. This is because the firm uses it’s assets (cash) to pau dividends so it now has fewer assets
What are the 4 ways to implement a stock repurchase?
- Open-market repurchase
- Tender offer
- Dutch auction
- Private negotiation (greenmail)
Describe an open-market purchase
Firm purchases stock in the secondary market
Describe a tender offer
Firm offers to buy back a stated number of shares on pre-specified terms (amount, price, time)
Describe a dutch auction
Firm states a range of prices at which it is prepared to repurchase
What happens to a firm’s value after stocks are repurchased?
A firm’s market value falls but its share price doesn’t. This is because although the firm reduces its assets by repurchasing, it also reduces the number of outstanding shares
What is the MM dividend irrelevance proposition?
In a perfect capital market, ignoring personal taxes and holding fixed the investment policy of a firm, the firm’s choice of dividend policy is irrelevant to its value
What are the 3 main signalling effects of payout policy?
- Dividends and repurchases provide clues about a company’s true financial prospects
- Informational aspects of dividends: dividend increases send good news about future cash flow and earnings
- Share repurchase also good news
What is the tax incentive for firms paying low dividends?
Capital gains taxed at lower rate than dividend income
What are the 3 steps of the Cash/Trust Nexus?
- How much did the company actually pay out during the period in question?
- How much could the company have paid out during the period in question?
- How much do I trust the management of this company with excess cash?
What is Free Cashflow to Equity (FCFE)?
A measure of how much cash is left in the business after non-equity claimholders (debt and preferred stock) have been paid and after any reinvestment needed to sustain the firm’s assets and future growth
What are outstanding shares?
Shares issued to and held by investors
What are treasury shares?
Shares held by the corporation itself
What is the declaration date?
The date on which the board of directors of a firm announce the next dividend payment
What is the ex-dividend date?
The date by which an investor must purchase a share to receive a dividend; the day before the record date
What is the record date?
The cut-off date used to determine which shareholders of a stock are entitled to a dividend
What is the consensus amongst Financial Executives concerning dividend policy?
They primarily try to avoid reducing dividends
What is a key assumption of the MM dividend irrelevance argument?
That new shares are sold at a fair price
What is a main reason as to why shareholders often insist on higher dividends?
Shareholders may not trust managers to spend retained earnings wisely
What are investors’ stock preferences if dividends are taxed more heavily than capital gains?
Investors should be willing to pay more for stocks with low dividend yields
