Corporate Finance Chapter 17

Front 1

payout policy of use FCF

Back 1

1. retain

- invest

-increase cash reserve

2.payout

-repurchase shares

-pay dividends

Front 2

dividend process

Back 2

1. declaration date (board declares dividend)

2. ex dividend date (buyers after this date do not receive)

3. record date (shareholders recorded by this date receive)

4. payable date (eligible shareholders receive)

Front 3

stock split, stock dividend

Back 3

company issues additional shares rather than cash to its shareholders

Front 4

how does dividend affect balance sheet

Back 4

1. reduce current retained earnings

2. or paid in capital (known as return capital)

3. or liquidation of assets (known as liquidating dividend)

different tax treatment!!

Front 5

open market repurchase

Back 5

-Most common ways for firms to repurchase -shares

-announced to investors

- not obligated to repurchase full amount

SEC not purchase more than 25% of average daily trading volume or within 30 min of the colse of trade

Front 6

tender offer

Back 6

firm offers to buy shares at prespecified price during short time period- generally wihin 20 days.

usually substantial premium.

-someimes might cancel when not enough are tendered

Front 7

Dutch auction

Back 7

firm lists different prices, shareholder indicate at each price how much they are willin to sell. Firm pays lowest price at which it can buy back desired number of shares

Front 8

targeted repurchase

Back 8

repurchase shares directly from large shareholder (eg greenmail)

Front 9

share repurchase options

Back 9

1. open market repurchase

2. tender offer

3. dutch auction

4.targeted repurchase

Front 10

cum dividend

Back 10

just before exdividend date, stock is traded at cum dividend.

in perfect capital markets, when a dividend is paid, the share price drops by the amoun of the dividend when the stock begins to trade ex-dividend

Front 11

in perfect capital markets

Back 11

.. open market share repurchase has no effect on the stock price, and stock price is the same as cum dividend price if a dividend were paid instead

... investors are indifferent between firm distr funds through dividend or repurchase.

... firms choice of dividend policy is irrelevant for shareprice

Front 12

possibilities dividend policies for firm

Back 12

1. payout all cash as dividend

2. pay no dividend and use cash to repurchase

3. issue equity to finance larger dividend

Front 13

Tax disadvantages of dividends

Back 13

1. capital gains tax < dividend tax

2. capital gains tax can be deferred until investor sells, so also reason to prefer repurchase>dividend

3. higher tax rate on dividends also makes undesirable for a firm to raise funds to pay div

Front 14

what is optimal dividend level when dividend tax>capital gains tax?

Back 14

No dividend at all

Front 15

dividend puzzle

Back 15

firms continue to issue dividends despite their tax disadvantages

Front 16

strength of preference dividend-share repurchase

Back 16

-depends on difference cap gains and dividend tax rate

-depends on income, jurisdiction, retirement account or not

-because these differences frms attract different kinds of investors

Front 17

write down effective dividend tax rate, what does is measure?

Back 17

p.545

measures the additional tax paid by the investor per dollar of after tax capital gains income that is instead received as a dividend

Front 18

tax differences across investors

Back 18

- income level

- investment horizon

- tax jurisdiction

- type of investor account

Front 19

what would the follwing investors prefer?

1. long term investors

2. one year investors

3. pension funds

4. corporation

Back 19

1. heavily taxed on dividends, prefer repurchase

2. and 3. non taxed so no preference, want payout policy that most closely matches their cash needs

4. enjoy a tax advantage with dividends

Front 20

clientele effects

Back 20

1. investors with high income prefer low dividends

2. tax free, like corporation prefer high dividend

Front 21

dividend capture theory

Back 21

absent transaction costs, investors trade shares at time of dividend so that non taxed investors receive and need not hold the stock all the time.

evidence: large volume traded between announcement and ex dividend date.

but wealthy investors also keep sometimes, transaction costs.

Front 22

explain tradeoff payout vs retention

Back 22

retaining cash can reduce costs of raising capital, but also increase taxes and agency costs

Front 23

MM payout irrelevance

Back 23

in perfect capital markets, if a firm invests excess cashflows in financial securities, the firms choice of payout versus retention is irrelevant and does not affect initial value of the firm

Front 24

explain negative leverage

Back 24

cash: when receiving interest, you have to pay taxes on it. tax disadvantage on holding cash.

Front 25

if there is a taxdisadvantage why do some firms accumalate large cash balances?

Back 25

-to cover future potential cash shortfalls (eg R&D!)

-in case of large investments, avoid transaction costs of raising new capital (direct and indirect)

- firms with volatile earnings, to prepare for periods of loss.

Front 26

agency costs of retaining cash

Back 26

-mng may use funds inefficiently

- divided/repo may reduce mng incentive to waste

Front 27

dividend smoothing

Back 27

maintaining relatively constant dividends. also more frequently increased rather than cut

Front 28

dividend signaling hypothesis

Back 28

1. Increased: positive signal or lack of investment opportunities.

2. decreased: earnings rebound in the near term

dividend policy reflects mng views on firms future earnings prospects

Front 29

share repurchase signaling

difference with dividend signaling?

Back 29

- actual amount vs amount annouced can be different

- may take several years to complete share repurchase

- firms do not smooth repurchase from year to year

- cost of share repurchase depends on market price of stock.

share repurchase signal undervalued

Front 30

stock dividend

Back 30

receive stocks from company (stock split if stock dividend >50%) or from subsidiary (spin off)

Front 31

reasons stock dividends or stock split?

Back 31

1. keep shareprice in range to be attractive for small investors.

2. increased liquidity may boost share price (on average 2%)

3. usually keep stock from exceeding $100

4. also dont want shareprice too low: transaction costs relatively too high: reverse split

5. through these mechanisms firms can keep price in a range

Front 32

spin off, reasons

Back 32

distribute shares of subsidiary

1. avoids transaction costs associated with sale

2. special dividend is not taxed as a cash distribution, shareholders only liable for cap gains tax when they sell spin off shares.

Front 33

wef

Back 33

dm fk