Details Title: Finance 314 Description: Dividends Total Flash Cards: 15 Created: 03/26/2009 15:20:13		New Users: To study from this flashcard set, or to create your own your own study flash cards, REGISTER HERE. Existing Users: CLICK HERE. Additional Finance Flashcards
Cards in this set: Term Cash Dividends Definition Regular cash dividend – cash payments made directly to stockholders, usually each quarter Extra cash dividend – indication that the “extra” amount may not be repeated in the future Special cash dividend – similar to extra dividend, but definitely won’t be repeated Liquidating dividend – some or all of the business has been sold Term Dividend Payment Definition Declaration Date – Board declares the dividend and it becomes a liability of the firm Ex-dividend Date Occurs two business days before date of record If you buy stock on or after this date, you will not receive the dividend Stock price generally drops by about the amount of the dividend Date of Record – Holders of record are determined and they will receive the dividend payment Date of Payment – checks are mailed Term Does Dividend Policy Matter? Definition Dividends matter – the value of the stock is based on the present value of expected future dividends Dividend policy may not matter Dividend policy is the decision to pay dividends versus retaining funds to reinvest in the firm In theory, if the firm reinvests capital now, it will grow and can pay higher dividends in the future Term Why low payout is desireable Definition Individuals in upper income tax brackets might prefer lower dividend payouts, given the immediate tax liability, in favor of higher capital gains with the deferred tax liability Flotation costs – low payouts can decrease the amount of capital that needs to be raised, thereby lowering flotation costs Dividend restrictions – debt contracts might limit the percentage of income that can be paid out as dividends Term Definition Term High payout Definition Desire for current income Individuals that need current income, i.e. retirees Groups that are prohibited from spending principal (trusts and endowments) Uncertainty resolution – no guarantee that the higher future dividends will materialize Taxes Dividend exclusion for corporations Tax-exempt investors don’t have to worry about differential treatment between dividends and capital gains Term Dividends and signals Definition Asymmetric information – managers have more information about the health of the company than investors Changes in dividends convey information Dividend increases Management believes it can be sustained Expectation of higher future dividends, increasing present value Signal of a healthy, growing firm Dividend decreases Management believes it can no longer sustain the current level of dividends Expectation of lower dividends indefinitely; decreasing present value Signal of a firm that is having financial difficulties Term Residual divedend policy Definition Determine capital budget Determine target capital structure Finance investments with a combination of debt and equity in line with the target capital structure Remember that retained earnings are equity If additional equity is needed, issue new shares If there are excess earnings, then pay the remainder out in dividends Term Compromise dividend policy Definition Goals, ranked in order of importance Avoid cutting back on positive NPV projects to pay a dividend Avoid dividend cuts Avoid the need to sell equity Maintain a target debt/equity ratio Maintain a target dividend payout ratio Companies want to accept positive NPV projects, while avoiding negative signals Term Management view on dividend policy Definition Managements’ View of Dividend Policy Agree or Strongly Agree 93.8% Try to avoid reducing dividends per share 89.6% Try to maintain a smooth dividend from year to year 41.7% pay dividends to attract investors subject to “prudent man” restrictions Important or Very Important 84.1% Maintaining consistency with historic dividend policy 71.9% Stability of future earnings 9.3% Flotation costs to issue new equity Term Stock repurchase Definition Company buys back its own shares of stock Tender offer – company states a purchase price and a desired number of shares Open market – buys stock in the open market Similar to a cash dividend in that it returns cash from the firm to the stockholders This is another argument for dividend policy irrelevance in the absence of taxes or other imperfections Term Stock repurchase Definition Company buys back its own shares of stock Tender offer – company states a purchase price and a desired number of shares Open market – buys stock in the open market Similar to a cash dividend in that it returns cash from the firm to the stockholders This is another argument for dividend policy irrelevance in the absence of taxes or other imperfections Term real world cosiderations   Definition Stock repurchase allows investors to decide if they want the current cash flow and associated tax consequences In our current tax structure, repurchases may be more desirable due to the options provided stockholders The IRS recognizes this and will not allow a stock repurchase for the sole purpose of allowing investors to avoid taxes Term Stock splits Definition Stock splits – essentially the same as a stock dividend except expressed as a ratio For example, a 2 for 1 stock split is the same as a 100% stock dividend Stock price is reduced when the stock splits Common explanation for split is to return price to a “more desirable trading range” Term Stock dividends Definition Pay additional shares of stock instead of cash Increases the number of outstanding shares Small stock dividend Less than 20 to 25% If you own 100 shares and the company declared a 10% stock dividend, you would receive an additional 10 shares Large stock dividend – more than 20 to 25%