Topic 10 Payout Policy: Dividends and Share Repurchases

Question 1

Tax difference dividend vs repurchase

Answer 1

dividends at dividend tax rate vs repurchases taxed at capital gains rate

Question 1

MM Dividend Policy irrelevance

Answer 1

in a perfect capital market holding fixed investment decisions of the firm the firm’s choice of dividend policy is irrelevant and does not affect the initial share price

-investors can change payout policy to what they desire in Mt Olympus

-in the real world -> frictions from taxes, financial distress, and information asymmetries

Question 2

Dividend Capture theory

Answer 2

Investors can trade around the dividend payment date
-hard to do post-2019 tax code with qualified dividends

Question 3

4 types of repurchase or buybacks

Answer 3

1) open market repurchase -most common
2) accelerated share repurchase -IB borrows shares from institutions and sells them to the firm immediately canceling them
3) Tender offer- firm buys within a period at a pre-determined price at 10-20% premium
4) Target Repurchase - The firm negotiates with a particular seller