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FINC206 > Dividend > Flashcards

Dividend Flashcards

1
Q

dividend

A

distribution from firm to shareholders

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2
Q

payout policy

A

the way a firm chooses between alternative ways to cash out to shareholders

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3
Q

div policy

A

a subset of wider issues of financing decision making
tradeoff between paying out earnings or using them as a source of finance

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4
Q

there’s a strong interrelationship between

A

firm financing, investment and dividend decisions

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5
Q

dividend timeline (which comes first…)

A

declaration date
ex div date
record date
payable date

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6
Q

declaration date

A

firm declares and announces the next regular, irregular or special dividend (if have surplus cash)

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7
Q

ex div date

A

usually 1 biz day before record date
date by which people need to own the stock to receive divs
buyers on or after this day will not receive div

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8
Q

SP usually drops on

A

ex div date

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9
Q

record date

A

shareholders recorded by this date who will receive div

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10
Q

payable date

A

eligible shareholders will get div paid
could be months later

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11
Q

price behaviour of SP

A

theoretically if markets are efficient share price will fall by exact D amount on ex-div date
but typically fall by less than that due to taxation

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12
Q

is there an optimal div policy?
w and w/out PCM

A

in PCM div policy has no affect on shareholders wealth as investors can just recreate CFs if needed
without PCM either doesn’t matter or it does and high or low div payout is preferred

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13
Q

preference of high or low div payout ratio

A

low means firm is reinvesting lots more so could be a sign of expansion or not doing well

too high could be unsustainable and means paying out too many earnings, but could also be a good sign

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14
Q

3 common div policies

A

residual
smoothed
stable

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15
Q

residual div policy

A

leftover residuals go to payout
firm uses earnings to pay capital expenses then divs
annual divs fluctuate depending of earnings and investment needs
can be a volatile policy making divs uncertain in market

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16
Q

smoothed (target pay out) div policy

A

firms only raise divs when earnings are thought to be solid
represents the long-term average residual payout policy
constant
fluctuating div amount
aims for divs to equal long term diff between expected profits and expected investment needs

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17
Q

stable div policy

A

no matter what earnings are pay an exact C amount of D
could be increasing
increase C in response to increasing expected profits in future

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18
Q

what is a less formal type of stable div policy?

A

low, regular, div + extra policy

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19
Q

dividend policy and investment policy cross over and MM view

A

should not forgo NPV + projects in order to raise Ds
MM suggest firms investment policy is set well before and not impacted by firm changes

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20
Q

MM irrelevance theory

A

div policy has no effect on firm value
there is a tradeoff between retaining profits for investments or paying D and issues new shares to replace cash paid out as D

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21
Q

MM irrelevance theory states that firm value is determined by

A

earning power of the firms assets

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22
Q

does paying a D or issuing new shares change firm value or wealth of old shareholders?

A

no

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23
Q

the gain in D income is offset by

A

loss of capital gains

24
Q

SP drops by ___ but this is offset by __

A

D
receiving D

25
Q

repurchasing shares decreases __ but keeps __ constant

A

Veq and no shares issued but SP same

26
Q

corporate dividend is

A

homemade dividend

27
Q

when to sell or buy shares… (homemade)?

A

if D < desired, sell to gain desired cash
if D> desired, buy additional shares with excess( creation of homemade capital gain)

28
Q

if participation occurs, decrease in holding value is

A

offset by cash received by repurchase

29
Q

classical tax system

A

double taxation of div income @ firms and personal level
tax on cap gains < tax on div income
preference for earnings retention than div payment

30
Q

Dividend imputation system

A

double taxation of retained earnings @ firm tax level then capital gains when shares are sold

31
Q

SP for Dividend imputation system

A

SP decreases by > D due to value of franking credit

32
Q

in Dividend imputation system firm chooses earnings distribution:

A

earnings retention (CG)
or
payment of franked divs (FD)
or unfranked divs (UD)
choice depends on shareholders personal tax and their status (usually franked divs is preferred)

33
Q

how does the Dividend imputation system work?

A

firm pays tax on domestic sourced income at Tc
div paid from after tax net income to shareholders
they recieve imputation credit for the amount of corp tax paid
shareholder can deduct this amount from tax payable
firm essentially pays tax on D income on behalf of investors

34
Q

with franked credits actual SP usually

A

less than imagined as div income you receive requires you to pay income tax on it
also not a controlled experiment

35
Q

6 non-tax reasons for relevance of div policy

A
  • info effects/ div signalling
  • current income preferences
  • div stability
    -agency costs
    -share issue costs for firm
  • transaction costs to investors
  • div clientele
36
Q

info effects and div signalling

A

increase in D means increase in SP
share holders think its a good sign and vice versa sends bad signs to market

37
Q

current income preferences

A

some shareholders need stable income from shares

38
Q

div stability

A

shareholders prefer constant stable flow and are more likely to pay a premium to reduce risk

39
Q

agency costs

A

divs reduce FCF to wasteful managers

40
Q

share issue costs for firms

A

firm pays div and needs to issue new shares to fund investment

41
Q

transaction costs for investors

A

costs to buy and sell shares
low payout:
- sell shares and brokerage cost/tax
high payout:
- reinvest more shares
- brokerage cost

42
Q

div clientele

A

different investors invest with firms that align their div likings which affects supply and demand of stocks

43
Q

stock dividend

A

a payment to shareholders that of additional shares not cash (like DRIP)

44
Q

stock div and SP

A

reduces SP as Veq is divided upon more shares

45
Q

stock split

A

stock prices too high so split them so lower price and then more attractive to smaller investors

46
Q

shares repurchase

A

firms offer to shareholders to buy back shares at a fixed price
could be financed through d or e

47
Q

what does a share repurchase influence?

A

ownership structure, cap structure, EPS, SP(+ usually),

48
Q

What do share repurchases send as market signalling?

A

a good sign if the company wants more shares

49
Q

7 motives for shares repurchase

A

div substitution
shareholder preference for divs vs cap gains
increased performance
financial flexibility
FCF
Info signalling
executive compensation

50
Q

div substitution

A

instead of paying div

51
Q

shareholder preference for divs vs cap gains

A

if want liquidity sell shares
if want capital gains hold onto

52
Q

increased performance

A

increases EPS, D/E ratio
less shares so increased performance

53
Q

financial flexibility

A

divs are commitment so repurchases don’t have that commitment

54
Q

FCF

A

using cash to buy back shares decreases FCF to wasteful managers

55
Q

info signalling

A

good sign if a firm is repurchasing

56
Q

executive compensation

A

avoids negative effect of divs on share and option value as when u pay divs SP decreases

57
Q

in the real world what happens to SP

A

increases on announcement of share repurchases

FINC206 (4 decks)

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