Corporate Finance Chapter 7

Different dividend rates

(1) the dividend has a zero growth rate (2) the dividend grows at a constant rate (3) the dividend grows at a nonconstant rate

Staggering has two basic effects:

1. Staggering makes it more difficult for a minority to elect a director because there are fewer directors to be elected at one time 2. Staggering makes takeover attempts less likely to be successful because it makes it more difficult to vote in a majority of new directors

General rights of shareholders

1. The right to share proportionally in dividends paid. 2. The right to share proportionally in assets remaining after liabilities have been paid in a liquidation. 3. The right to vote on stockholder matters of great importance, such as a merger. Voting is usually done at the annual meeting or a special meeting. 4. Voting rights

Characteristics of dividends

1. Unless a dividend is declared by the board of directors of a corporation, it is not a liability of the corporation. A corporation cannot default on an undeclared dividend. As a consequence, corporations cannot become bankrupt because of nonpayment of dividends. The amount of the dividend and even whether it is paid are decisions based on the business judgment of the board of directors. 2. The payment of dividends by the corporation is not a business expense. Dividends are not deductible for corporate tax purposes. In short, dividends are paid out of the corporation's aftertax profits. 3. Dividends received by individual shareholders are taxable. However, corporations that own stock in other corporations are permitted to exclude 70 percent of the dividend amounts they receive and are taxed only on the remaining 30 percent.

proxy

A grant of authority by a shareholder allowing another individual to vote his or her shares.

dividend growth model

A model that determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate.

straight voting

A procedure in which a shareholder may cast all votes for each member of the board of directors.staggered elections

broker

An agent who arranges security transactions among investors.

dealer

An agent who buys and sells securities from inventory.

common stock

Equity without priority for dividends or in bankruptcy. Usually applied to stock that has no special preference either in paying dividends or in bankruptcy

cumulative

If preferred dividends are cumulative and are not paid in a particular year, they will be carried forward as an arrearage. Must be paid before the common shareholders can receive anything

Preferred stock

Stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights.

cumulative voting

a procedure in which a shareholder may cast all votes for one member of the board of directors

dividend yield

a stock's expected cash dividend divided by its current price

Dividends payable on preferred stock are either

cumulative or noncumulative

Staggered elections

only a fraction of the directorships are up for election at a particular time