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What are the different types of dividends and how is a dividend paid?

Regular cash dividend
Extra dividends
Special dividends
Liquidating dividends

1, declaration date
2. Ex dividend date
3. Date of record
4. Date of payment


What is the clientele effect and how does it affect the dividend policy relevance?

The clientele effect- stocks attract particular groups based on dividend yield and the resulting tax effects

Makes the dividend policy irrelevant


WhT is the information content of dividend changes?

Stock prices rise when the current dividend is unexpectedly increased, and they fall when the dividend is unexpectedly decreased.


What is the difference between a residual dividend policy and a compromise dividend policy?

In residual the firms maintain a fixed debt/equity ratio and only pay dividends if there is money left over after earnings. The compromise approach views debt/equity ratio as a long range goal and can vary in the short run if necessary to avoid dividend cuts or the need to sell new equity


What are stock dividends and how do they differ from cash dividends?

Stock dividends are payments made by firms in the form of stock, diluting the value of each share outstanding. The difference between cash and stock dividends is that cash dividends are cash and regular


How are share repurchases an alternative to dividends and why might investors prefer them?

Paying back investors a firms earnings by repurchasing shares which provides more preferable tax treatment


How do you calculate the operating cycle and the cash cycle?

Operating cycle=inventory period + accounts receivable period

Cash cycle= operating cycle - accounts payable period


Whatbis the difference between a flexible short term financial policy and a restrictive policy? What are the pros and cons of each?

Flexible policy maintains a high ratio of current assets to sales and restrictive maintains a low ratio of current assets to sales.

Flexible has less short term debt but more long term debt. And restrictive has more short term debt with less long term debt


What are the key components of a cash budget?

Sales and cash collections
Cash outflows
The cash balance


What are the major forms of short term borrowing?

Operating loans
Letters of credit
Secured loans
Securitized receivables
Inventory loans
Trade credit
Money market financing


What are the major reasons for holding cash?

Speculative motive- take advantage of unexpected opportunities
Precautionary motive- in case of emergencies
Transaction motive- hold cash to pay the day to day bills


What is the difference between disbursement float and collection float?

Disbursement floats are cheques written by firms and cause a decrease in the book balance. Collection floats are cheques received by firms and cause an increase in the book balance.


How does a lockbox system work?

Customers or firms mail their cheques to a neat post office box where banks visit daily and can transfer funds directly to the according form or account which saves mailing and processing times for accounts receivables


What are the major characteristics of short term securities?

Default risk


What are the key issues associated with credit mgmt?

Granting credit increases sales
Costs of granting credit- chance that customers won't pay and financing receivables


What are the cash flows from granting credit?

1) credit sale is made
2) customer mails cheque
3) firm deposits cheque in bank
4) Bank credits firms account


How would you analyze a change in credit policy?

Revenue effects
Cost effect
The cost of debt
The probability of nonpayment
The cash discount


How would you analyze where to grant credit to a new customer?

Gather credit info:
Financial statements
Credit reports on a customers payment history with other firms
The customers payment history with the firm

Determining creditworthiness
-credit scoring
-5 c's of credit:
Character-the customers willingness to meet credit obligations
Capacity-the customers ability to meet credit obligations out of operating cash flows
Capital-the customers financial reserves
Collateral - a pledged asset in the case of default
Conditions - general economic conditions in the customers line of business


What is ABC inventory mgmt?

Inventory is broken into to three or more groups and seperated by inventory value to inventory count.


How do you use the EOQ model to determine optimal inventory levels

The optimal order quantity is where the cost function is minimized. This will occur where total carrying costs = total restocking costs.


What is the difference between a lessee and a lessor?

A lessee is the user of an asset and makes payments. The lessor is the owner of the asset and receives payments


What is the difference between and operating lease and a capital lease?

Operating lease is short term where the lessor is responsible for insurance, taxes and maintenance. Often cancelable

Capital or financial lease is longer term where lessee is responsible for insurance, taxes and maintenance. Generally not cancelable


What are the requirements for a lease to be tax deductible?

Lease must be primarily for business purposes and not just to avoid taxes
Does not apply to conditional sales agreements
Lessee cannot automatically acquire title of the property after payment of a specified amount in the form of rentals
Lessee cannot be required to buy the property during or at the termination of the lease
Lessee cannot have the right during or at the expiration of the lease to acquire the property at a price less than fair market value


What are typical incremental cash flows and how do you determine the net advantage to leasing?

Typical cash flows:
After tax lease payment
Lost depreciation tax shield (both outflows)
Initial cost of machine (inflow)

The net advantage of lessening is determined by looking at the NPV of the decision if it is negative then it is better to buy and not lease and vice versa


What are some good reasons for leasing?

Taxes may be reduced
May reduce some uncertainty
May have lower transaction costs
May require fewer restrictive covenants
May encumber fewer assets than secured borrowing


What are some dubious reasons for borrowing?

Statement of financial positions may look better if the lease does not have to be accounted for on the statement

Leases normally do not require either a down payment or a security deposit


What are the different methods for achieving a takeover?

Proxy contest
Going private


How do we account for acquisitions

Merger or consolidation
Acquisitions of stock
Acquisition of assets


What are some of the defensive tactics that firms use to thwart takeovers

Control block
Corporate charter
Targeted repurchase aka greenmail
Exclusionary offers and dual class stock
Poison pills
Shareholder rights plan
Going private with leveraged buyouts