Finance Ch. 14
what are flotation costs?
the costs of selling stock, if two firms are identical but one pays out high dividends and the other saves, the one that saves will build equity much faster so the first company must sell stock in order to increase equity and this is expensive.
What is an open market purchase?
the firm simply repurchases stock just as anyone would buy shares of a particular stock, and the firm does not reveal itself as the buyer.
Tax rates...
they matter but they are not primary determinant of dividend policy.
What are regular cash dividends?
Cash payment made by a firm to its owners in the normal course of business, usually made four times per year.
Why might a firm choose low dividend payout in regards to taxes?
Effective tax rates are higher on dividends than on capital gains so if the firm were to pay out less on dividends and reinvest this capital gains. In the future return on capital gains will be greater.
What is the effect of a stock repurchase on a firm's EPS? It's PE?
It causes earnings per share to increase because it reduces the number of outstanding shares, but has no effect on total earnings. As a result, EPS rises. The PE stays exactly the same.
What is the trading range?
Price range between highest and lowest prices at which a stock is traded.
What are the pros and cons of paying dividends?
Pros: 1.) cash dividends can underscore good results and provide support to the stock price. 2.) dividends may attract institutional investors who prefer some return in the form of dividends. Having a mix of individual and institutional investors is good because it allows to firm to reach a wider market. 3.) stock price increases with the announcement of new/increased dividend. 4.) dividends absorb excess cash flow and may reduce agency costs that arise from conflicts between management and shareholders. Cons: 1.) dividends are taxed to recipients 2.) dividends can reduce internal sources of financing. it may force the firm to forgo positive NPV projects or rely on costly external equity financing. 3.) once established, dividend cuts are hard to make without negatively affecting a firms stock price
What are the mechanics of the cash dividend payment?
declaration date, ex-dividend date, date of record, date of payment
What is the effect of a stock split on stockholder wealth?
it has no effect
What is a reverse split?
stock split under which a firms number of shares outstanding is reduced
What are some of the reasons for a low payout?
taxes, flotation costs, dividend restrictions
What are the implications of dividend clienteles for payout principles?
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Why might a stock repurchase make more sense than an extra cash dividend?
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What is a stock split?
An increase in a firm's shares outstanding without any change in owners equity. Stock dividends of less than 20 to 25 percent are small and above this are large. Large stock dividends are not uncommon. they may actually decrease the liquidity of a companies shares.
Corporate investors vs. Tax-exempt investors?
Corporate investors receive a significant tax break on dividends but are therefore often taxed heavily on capital gains. Tax-exempt investors such as pension funds, endowment funds, and trust funds are often set up to manage money for the benefit of others. They also prefer a high-dividend payout.
What is the declaration date?
Date on which the board of directors passes a resolution to pay a dividend.
What is the date of payment?
Date that the dividend checks are mailed.
What is an ex-dividend date?
Date two business days before the date of record, establishing those individuals entitled to a dividend.
Are dividends irrelevant?
No not at all but dividend policy is irrelevant.
What is distribution?
Payment made by a firm to its owners from sources other than current or accumulated retained earnings. They come in several different forms: Regular cash dividends - normal cash payment Extra dividends - extra meaning that part may or may not be repeated in the future. Special dividends - this is viewed as a truly unusual or one time event and won't be repeated. Liquidating dividends - some or all of the business has been liquidated
What is a stock dividend?
Payment made by a firm to its owners in the form of stock, diluting the value of each share outstanding.
What is a dividend?
Payment made out of a firm's earnings to its owners, in the form of either cash or stock.
What is the dividend policy question?
Should the firm pay out a large percentage of its earnings now or a small percentage (or even zero) to invest it?
What is the date of record?
The date by which holders must be on record to receive a dividend.
What is a tender offer?
The firm announces to all of its stockholders that it is willing to buy a fixed number of share at a specific price.
What is a targeted repurchase?
The firm may repurchase stock from specific individual stock holders.
What is a stock repurchase?
The purchase, by a corporation, of its own shares of stock; also known as a buyback.
How should the price of stock change when the stock goes ex dividend?
The value of the stock drops by about the price of the dividend.
Putting it all together...
aggregate dividends and stock repurchases are huge and they have increased in nominal and real terms over the years. dividends are heavily concentrated among a relatively small number of large, mature firms. Managers are very reluctant to cut dividends. Managers smooth dividends, raising them slowly as earnings grow. Stock prices react to unanticipated changes in dividends.
clientele effect
argument that stocks attract particular groups based on dividend yield and the resulting tax effects.
round lot v odd lot?
common trading unit of 100 shares v less than 100 shares