term 2 lecture 7 payout policy 1

Question 1

what is payout policy?

Answer 1

the way a firm chooses between the alternative ways of distributing free cash flow to equity holders

Question 2

what are some common empiracle observations about dividends??

Answer 2

Question 3

what is the declaration date?

Answer 3

Declaration Date: The date on which the board of directors
authorizes the payment of a dividend. After the board
declares the dividend, the firm is legally obliged to make the
payment.

Question 4

what is the record date?

Answer 4

Record Date: When a firm pays a dividend, only shareholders
of record on this date receive the dividend. Typically takes 2
business days for shares to be registered.

Question 5

what is the ex dividend date?

Answer 5

Ex-dividend Date: A date, one business day prior to a
dividend’s record date, on or after which anyone buying the
stock will not be eligible for the dividend.

Question 6

what is the payable date?

Answer 6

Payable Date (Distribution Date): A date, generally within a
month after the record date, on which a firm pays dividends
to its registered stockholders.

Question 7

what is a special dividend?

Answer 7

Special Dividend: A one-time dividend payment a firm
makes, which is usually much larger than a regular dividend.

Question 8

what is a stock split or a stock dividend?

Answer 8

Stock Split (Stock Dividend): When a company issues a
dividend in shares of stock rather than cash to its
shareholders

Question 9

what is the return of capital?

Answer 9

Return of Capital: When a firm, instead of paying dividends
out of current earnings (or accumulated retained earnings),
pays dividends from other sources, such as paid-in-capital or
the liquidation of assets.

Question 10

what is the liquidating dividend?

Answer 10

Liquidating Dividend: A return of capital to shareholders from a business operation that is being terminated.

Question 11

what is a share repurchase?

Answer 11

an alternative way to pay cash to investors where the firm uses cash to buy shares of its own outstanding stock

Question 12

what are the share repurchase mechanisms?

Answer 12

open market repurchase, tender offer, dutch auction, target repurchase

Question 13

what is the open market repurchase mechanism?

Answer 13

Question 14

what is the tender offer mechanism?

Answer 14

Question 15

what is the dutch auction mechanism?

Answer 15

Question 16

what is the targeted repurchase mechanism?

Answer 16

Question 17

what is the assumptions of Modigliani-Miller’s model of dividend irrelevant?

Answer 17

Question 18

how many periods are there within the dividend irrelevance MM model?

Answer 18

Question 19

what is the formula relating the all equity firm value, value of equity capital and market cap?

Answer 19

Question 20

what are sources and uses of funds in the MM model?

Answer 20

Question 21

what is the formual for the current value of the firm in the dividend irrelevance MM model?

Answer 21

Question 22

what is the implication of the current value of the firm in the dividend irrelevance?

Answer 22

current payout policy (d_t+1) does not affect the current value fo the firm

Question 23

in a perfect capital market, what is the impact of a dividend on the share price?

Answer 23

in a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex dividend

Question 24

in a perfect capital market, what is the impact on an open market share repurcahse on the stock price?

Answer 24

In perfect capital markets, an open market share repurchase has no effect on the stock price, and the
stock price is the same as the cum-dividend price, if a dividend were paid instead.

Question 25

what is the trade off relating to dividends?

Answer 25

there is a tradeoff between current and future dividends, if they pay a higher current dividend, then future will be lower and vice versa

Question 26

what is MM dividend irrelevance?

Answer 26

Question 27

why in a perfect capital market, investors are indifferent between firms fund distribution mechanism?

Answer 27

by reinvesting dividends or selling shares, they can replicate either payout method on their own.

Question 28

what determines the level of payouts that a firm can make to its investors?

Answer 28

the firms free cash flow.

Question 29

in reality, capital markets are not perfect, what are the implications of this on the firms payouts policy?

Answer 29

Question 30

what is the impact of taxes on dividends and capital gains?

Answer 30

shareholders must pay taxes on the dividends they receive. dividends are typically taxed at a higher rate than capital gains. even if the tax rates were the same the two methods are not equivalent: long term investors can defer the capital gains tax forever by not selling. the higher tax rate on dividends make it undesirable for a firm to raise funds to pay a dividend. when dividends are taxed at a higher rate than capital gains, if a firm raises money by issuing shares and then gives that money back to shareholders as a dividend, shareholders are hurt because they will receive less than their initial investment

Question 31

what occurs when the tax rate on dividends is greater than the tax rate on capital gains?

Answer 31