Unit 8 Flashcards

1
Q

Cash dividends types

A

Regular
Special
Extra cash
Liquidating

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2
Q

Factors for high dividends payout

A
  1. Desire for current income
  2. Resolution of uncertainty
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3
Q

Clientele effect

A

Stocks attract particular groups based on dividend yield and resulting tax effects

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4
Q

Clientele effect

A

Stocks attract particular groups based on dividend yield and resulting tax effects

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5
Q

Advantage of paying dividends

A
  1. Underscore good results and supports the stock price
  2. Allows investors to raise capital at a lower cost because of a mixture of institutional and individual investors
  3. Stock price usually increases when dividends are new or increased
  4. Absorb excess CF and reduce agency costs
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6
Q

Disadvantages of paying dividends

A
  1. Taxed to recipients
  2. Reduce internal sources of financing
  3. Dividend cuts are hard to make without affecting the stock price
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7
Q

Stock dividend

A

Payment made by firm to its owner in form of stock

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8
Q

Stock split

A

Increase in firm’s share outstanding without change in owner’s equity

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9
Q

Reverse split

A

Stock split which firm’s number of shares outstanding is reduced

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10
Q

Current payout methods

A
  1. Constant dividend (% of earnings)
  2. Stable dividend (increases when earnings increase sustainably for long term)
  3. Residual dividend policy
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11
Q

Residual dividend policy

A
  1. Earnings used to invest in projects with positive NPV
  2. Remaining earnings declared as dividends
  3. Where no retained earnings left, no dividends are paid
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12
Q

Pros of Residual dividend policy

A
  1. Ensures cash is efficiently distributed towards investments
  2. Requires FEWER new stocks and LOWER flotation costs
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13
Q

Cons of residual dividend policy

A
  1. Results in unstable dividends as the dividends are only paid out when the company has paid all its capital expenditures.
  2. Not suitable for all investors as they want regular returns and not capital appreciation
  3. -Amounts not distributed is invested is different growth opportunities, which subsequently increases overall risk exposure of the company as such risk can result in a loss if the expected returns are not realized.
  4. -Gives constantly changing signals regarding management expectations
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