Unit 7: Capital Structure & Dividends Flashcards
What information do stock repurchases give the market
Sends signal management believes price is low
What is a stock dividend
Pays investors in additional shares
What 3 things can a company choose to do with excess cash rather than paying dividends
Select additional capital budgeting projects
Repurchase shares
Acquire another company
Why might higher dividend payout be desirable
- Low income individuals may value
- Tax-exempt investors don’t care
What two ratios are the focus of financial leverage
(ROE) return on equity (EPS) Earnings per Share
What is the Ex-dividend Date
Two business days before date of record which establishes individuals entitles to dividend
True or False - Dividends are irrelevant
False - investor prefer higher dividends
What is Asymmetric information
Managers have more information about health of company than investors
What does financial leverage mean
The extent to which a firm relies on debt
What is the date of record
Date which holders receive dividend
When we choose the firms capital structure - what are we trying to do
Minimize WACC
What is the date of payment
Date of dividend payment
What is the dividend payment chronology
Declaration date
Ex-Dividend Date
Date of Record
Date of Payment
What are the 4 basis types of dividends
Cash
Extra
Special
Liquidating
What is a liquidating dividend
Some or all of the business has been sold
What does Capital Restructuring involve
Changing the amount of leverage a firm has without changing the firms assets
What are dividends
Payments made in cash or stock to shareholders
What is Dividend Policy
Time pattern of dividend payout
What is the equation for the degree of financial leverage
Degree of financial leverage(DFL) = EBIT/
EBIT - Interest
What is the Declaration Date
Date at which board passes resolution to pay dividend
What is maximized if WACC is minimized
Firm value is Maximized
The risks associated with common shares are broken into these 3 components
Business Risk
Operating Leverage
Financial Leverage
What are homemade dividends
Individual investors ability to undo corporate policy by reinvesting dividends or selling shares
Why might a lower dividend payment be desirable
- Upper income holders may prefer due to tax consequences
- Flotation costs
- Dividend restrictions
What is distribution
Payments made to owners from sources other than current or accumulated earnings
What are the two factors favoring high dividend payout
Desire for current income
Resolution of uncertainty
What is an Extra Cash Dividend
indication dividend is special and may not be repeated
What is a Regular Cash Dividend
cash payment to stockholder usually each quarter
True or False - Dividend Policy is irrelevant
True - dividend policy merely establishes the trade off between dividends from different dates.
What is the Information Content Effect
Markets reaction to change in dividend payout
What happens when a stock splits
Number of shares available increases
Stock price is reduced
True or False - Firms paying higher dividends, all things being equal, have higher share prices
True
What is a Special Dividend
Viewed by market as one time event
What is the Clientele effect
Stocks attract particular groups based on dividend yield and resulting tax effects
What two things can a firm do to change leverage
Increase leverage by issuing debt and repurchasing shares
or Decrease leverage by issuing new shares and retiring outstanding debt.
