Chap 16 Flashcards
(44 cards)
Has the fraction of companies that pay dividends increased or decreased over time?
It has decreased.
Most of the non-dividend paying companies are high growth companies.
What happens if a stock “goes ex-dividend”?
its price falls by about the amount of the dividend.
True or false: Corporations are free to declare whichever they choose.
False, some countries require a minimum payout, sometimes there are restrictions imposed by lenders
Are dividends always in the form of cash?
No, some companies also declare stock dividends. For example, if the firm pays a stock dividend of 5%, it sends each shareholder 5 extra shares for every 100 shares currently owned.
What is the difference between a stock dividend and a stock split?
The distinction between a stock dividend and a stock split is technical. A stock dividend is shown in the accounts as a transfer from retained earnings to equity capital. A split is shown as a reduction in the par value of each share.
How do firms repurchase stock?
the firm announces that it plans to buy its stock in the open market, investors can then choose whether to accept or decline this offer
Why are managers reluctant to make dividend changes that may have to be reversed?
They are particularly worried about having to rescind a dividend increase and, if necessary, would issue shares or borrow to maintain the dividend.
Why do managers “smooth” dividends?
- dividend changes follow shifts in long-run, sustainable earnings.
- transitory earnings changes are unlikely to affect dividends
Why is an announcement of dividends good news to investors? (other than the obvious)
Investors know that managers are reluctant to reduce dividends and will not increase dividends unless they are confident that the payment can be maintained
-signals managers’ confidence in future profits
What does an increase in dividends mean in regards to the future profitability of the company?
Corporations will not increase their dividends if they cannot sustain the payments in the future, therefore an increase in dividends forecasts an increase in profitability for the company.
Which is more important to the investor, dividend level or dividend change?
dividend change; which they view as an important indicator of the sustainability of earnings
What are the three opposing arguments when deciding against dividends or repurchases?
- The rightists:
investors pay more for firms with generous, stable dividends - The lefts
repurchases are better because repurchases mean higher stock prices, and capital gains have been taxed at lower effective rates than dividends - The middle men
the choice between dividends and repurchases has no effect on value (this argument is called the middle-of-the-road)
Who founded the middle-of-the-road party?
Founded by Miller and Modigliani (always referred to as “MM”), when they published a proof that dividend policy is value-irrelevant in a world without taxes, transaction costs, and other market imperfections.
What did MM insist when valuing a company’s dividends?
one must consider dividend policy only after holding the firm’s assets, investments, and borrowing policy fixed.
In other words, dividend policy will have no impact on the value of the firm
What is a repurchase program?
A repurchase program reduces the number of outstanding shares and increases earnings and dividends per share.
What do each of these dividend terms mean?
- Record date
- Declaration date
- Payment date
- Ex-dividend date
Record date: The record date is the cut-off date established by a company in order to determine which shareholders are eligible to receive a dividend or distribution.
Declaration date: The date on which the board of directors of a company announces the next dividend payment.
Payment date: The payment date is the scheduled date the company pays the declared dividend.
Ex-dividend date: 2 business days before the record date
When repurchases are important, what are the two ways that you should consider valuing a stock?
- Calculate market capitalization (easier method):
forecasting and discounting the free cash flow paid out to shareholders. Then calculate price per share by=
equity market capitalization based on total free cash flow/ current number of shares outstanding
- Calculate the Value of dividends per share:
account for increased dividend growth rate per share
True or false:
Todays market capitalization and share price are not affected by how payout is split between dividends and repurchases.
true
What even is payout policy
It is the answer to two questions:
First, how much cash should the company pay out to its stockholders? Second, should the cash be distributed by paying cash divi- dends or by repurchasing shares?
If a company wishes to pay out larger dividends, but does not have any extra money to finance the dividends, what will they do? (if the firm fixes borrowing)
the only way it can finance the extra dividend is to sell more shares - but the firm cannot sell more shares because all of its assets, earnings, investment opportunities, etc. are fixed.
SO, there must be a transfer of value.
What is a transfer of value from the old to new stockholders?
The new ones get the newly printed shares, each one worth less than before the extra dividend was announced, and the old ones suffer a capital loss on their shares.
The capital loss is offset by the increase in dividends
What are the two ways of raising cash for the shareholders? Why do both options decrease the shareholders claim on the firm?
- If the firm pays a divi- dend, each share is worth less because more shares have to be issued against the firm’s assets.
- If the old stockholders sell some of their shares, each share is worth the same but the old stockholders have fewer shares.
What do the right-wing payout party believe?
points to real-world imperfections that could make high dividend payout ratios better than low ones
- there is natural clientele (old ppl) who look to their stock portfolios for a steady source of cash.
What is the strongest argument that the rightists have?
that paying out funds to shareholders prevents managers from misusing or wasting funds
