Payout Policy

Question 1

Explain the dividend procedure

Answer 1

A company board sets a dividend that is approved by the annual meeting.
Dividend payments are made to all stockholders holding shares on a particular record date.
Stocks trade “cum-dividend” untill two days before the record date.
Stocks trade “ex-dividend” thereafter.

Question 2

Dividend dates order

Answer 2

Declaration date
Ex-dividend date
Record date
Payment date

Question 3

When do firms repurchase stock?

Answer 3

When they have accumulated a large ammount of “unwanted” cash
When they wish to change the capital structure by replacing equity with debt

Question 4

When do firms prefer repurchases to dividends?

Answer 4

When they want to disburse cash without committing to regular dividend payments

Question 5

What are the M.M. Assumptions?

Answer 5

There are no tax considersations
There are no transaction costs
The investment, financing and operating policies of the firm are held fixed

Question 6

If the M.M. Assumptions hold, is the choice between repurchase and dividend relevant?

Answer 6

No

Question 7

What is the “rightist” argument?

Answer 7

That dividends may prevent managers from investing in negative NPV projects

Question 8

What is the “leftist” argument?

Answer 8

That there can be a difference between tax on dividends and capital gains

Question 9

What are clientele effects?

Answer 9

Some investors prefer dividend stock, some prefer more growth oriented stock without dividend