Distribution to Shareholders Flashcards
(37 cards)
What are the 5 potential good uses of FCF
- Interest Payments
- Principal Repayments
- Purchase of Short-Term Investments
- Paying Dividends
- Stock Repurchases
The Distribution Policy of a Company dictates?
- The level of distribution
- The form
- The Stability
- Frequency
The amount distribution is dependent on the investors?
preference: capital gains or dividends
T or F: The target payout ratio is already included in the target distribution ratio
T
The investor preference for returns will be determined by the
target distribution ratio
which is the amount to be paid in cash dividends to shareholders.
the target payout ratio
How many years does a planning horizon need?
often 5 years
What are needed to create dividend policies?
- Forecast Capital
- Capital Structure
- Equity Needs
- Target Payout
- Dividend Growth Rate
What is the four factors of an optimal distribution ratio?
- Investors’ Preference
- Firm’s Investment Opportunity
- Target Capital Structure
- Availability and cost of external capital
FACTORS THAT INFLUENCE DISTRIBUTION DECISIONS: debtors will have first claim to your earnings
Bond Indentures
FACTORS THAT INFLUENCE DISTRIBUTION DECISIONS: some shareholders have earlier claim to dividends
Preferred Stock Restrictions
FACTORS THAT INFLUENCE DISTRIBUTION DECISIONS: dividends can not exceed retained earnings
Impairment of Capital Rule
FACTORS THAT INFLUENCE DISTRIBUTION DECISIONS: shortage of cash
Availability of Cash
Shortage of cash in bank can be offset by
Borrowings
FACTORS THAT INFLUENCE DISTRIBUTION DECISIONS: prevent wealthy individuals from using corporations to avoid personal taxes
Improperly Accumulated Earnings Tax
The factor of improperly accumulated earnings tax is generally only applicable to
privately owned firms
FACTORS THAT INFLUENCE DISTRIBUTION DECISIONS: The floatation costs incurred when selling the stocks will have an impact on the level of future payouts
Cost of Selling New Stock
FACTORS THAT INFLUENCE DISTRIBUTION DECISIONS: If the firm can adjust its debt ratio without raising costs sharply, then it can pay the expected dividend—even if earnings fluctuate—by increasing its debt ratio.
Ability to Substitute Debt for Equity
FACTORS THAT INFLUENCE DISTRIBUTION DECISIONS:
If management is concerned about maintaining control
Control
Theories: the value of the firm depends only on the income produced by its assets, not on how this income is split between dividends and retained earnings.
Dividend Irrelevance Theory
Theories: stock’s risk declines as dividends increase.
-Dividends are favored because less risky
Bird in the Hand Theory
Theories: capital gains are taxed lower
Tax Preference Theory
According to the signaling hypothesis, what does an increase in dividend mean?
assumption that the firms believe that higher earnings will happen in the future
Investor group will prefer different dividend policies
The clientele effect
