W4 Flashcards
(30 cards)
What is payout policy?
The decision of how a firm distributes its free cash flow to equity holders, either through dividends or share repurchases.
What is a dividend?
A payment made to shareholders, usually in cash, from a firm’s earnings or reserves.
What is a share repurchase?
A transaction in which a company buys back its own shares from the market, reducing the number of outstanding shares.
What is the dividend yield?
Dividend Yield = Dividend per Share / Stock Price. It measures the income return from holding a stock.
What is the payout ratio?
Payout Ratio = Dividend per Share / Earnings per Share. It indicates the proportion of earnings paid out as dividends.
What are the key dates for dividend payments?
Declaration Date, Ex-Dividend Date, Record Date, Distribution (Payable) Date.
What is a special dividend?
A one-time, larger-than-usual dividend, typically used to distribute excess cash.
What is a liquidating dividend?
A dividend paid from capital rather than earnings, often indicating asset liquidation.
What is a stock dividend or stock split?
Distribution of additional shares to existing shareholders instead of cash, increasing shares outstanding while keeping total value unchanged.
What is an open market repurchase?
A firm buys back its own shares in the open market over time, like any investor.
What is a tender offer?
A firm offers to repurchase shares at a specified price, usually above market value, during a short window.
What is a Dutch auction repurchase?
Shareholders state prices at which they’re willing to sell, and the firm pays the lowest price sufficient to buy the desired amount.
What is a targeted repurchase?
A firm repurchases shares directly from a specific shareholder, often at a negotiated price.
What is greenmail?
A targeted repurchase to buy out a threatening investor, usually at a premium, to avoid a takeover.
What is the Modigliani-Miller dividend irrelevance proposition?
In perfect capital markets, a firm’s dividend policy does not affect its initial share price or value.
Why are dividends and repurchases equivalent in perfect markets?
Because investors can create homemade dividends by selling shares or reinvesting them.
What happens to share price on the ex-dividend date in perfect markets?
The share price drops by the amount of the dividend.
How are dividends taxed versus capital gains?
Dividends are taxed when paid; capital gains are taxed when realized, and often at a lower rate.
What is the effective dividend tax rate?
Effective Dividend Tax Rate = (Dividend Tax Rate − Capital Gains Tax Rate) / (1 − Capital Gains Tax Rate).
What is the optimal payout policy when dividends are taxed more heavily than capital gains?
Firms should avoid dividends and prefer share repurchases.
What is the dividend puzzle?
Despite tax disadvantages, many firms continue to pay dividends.
What is a dividend clientele?
A group of investors with similar tax preferences for dividends or capital gains.
What is the clientele effect?
Firms attract investors who prefer their specific dividend policy.
What is dividend capture?
A trading strategy to receive dividends by buying just before and selling just after the ex-dividend date.
