EFN412_Topic_06_Reading_and_Tutorial_Guide

EFN412_Topic_06_Reading_and_Tutorial_Guide - EFB307 Finance...

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EFB307 Finance 2 School of Economics and Finance, QUT Reading and Tutorial Guide Topic 06: Equity Finance 1- Dividends and Capitalization Changes Reading: PBEHP, 2009, 10 th edition, Chapter 11 PBEHP, 2009, 10 th edition, Chapter 9, sections 9.6-9.9 PBEHP, 2009, 10 th edition, Chapter 2, section 2.3.8 PBEHP, 2006, 9 th edition, Chapter 12 PBEHP, 2006, 9 th edition, Chapter 10, sections 10.7-10.10 PBEHP, 2006, Chapter 2, section 2.3.8 RTCWJ, 2004, 4 th edition, Chapter 1, Section 1.7 to the end of the Chapter RTCWJ, 2004, 3 rd edition, Chapter 1, Section 1.7 to the end of the Chapter Revision of the Two-Period Perfect Certainty Model that was covered in your introductory finance unit. (Particularly the section on dividend irrelevance). This is presumed knowledge for this unit. Optional alternative reading on this topic may be found in the following: RTCWJ, 2007, 4 th edition, Chapter 18 RTCWJ, 2007, 4 th edition, Chapter 2, Section 2.3 includes a brief summary of the Australian tax system and tax rates. Read and understand this material. RTCWJ, 2004, 3 rd edition, Chapter 19 RTCWJ, 2004, 3 rd edition, Chapter 2, Section 2.3 includes a brief summary of the Australian tax system and tax rates. Read and understand this material. Outline: Dividends and Dividend Policy Cash Dividends and Dividend Payment - Information Content of Dividends Does Dividend Policy Really Matter - Home Made Dividends Taxes and Imputation Factors Favouring Low Payout Factors Favouring High Payout Clientele Effect Establishing a Dividend Policy Residual Dividend Approach Dividend Stability Dividend Reinvestment Schemes Share Repurchase (Buybacks), Bonus Issues, Stock Splits, Rights Issue, Employee Share Plans Learning Objectives On completing this module students should be able to: Dividends Page 1
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Understand the difference between a classical system and an imputation system; Explain the effect of an imputation system on the returns to investors (dividends and capital gains); Outline the dividend process and recognise the differences amongst Dividend Reinvestment Plans (DRP), Dividend Election Schemes, and Share Buybacks; and Understand the dividend controversy and the three prevailing views on dividends versus capital gains. Dividends Page 2
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Imputation Example: What is the procedure for a company paying out Franked Dividends? Assume the following information for Polycorp Items from the previous year: Retained Earnings (RE): $600,000 Franking Account: $100,000 New business year items: Profit: $1,000,000 Tax on profit (30%): $300,000 Update: Funds available for distribution: $1,300,000 ( = RE + after tax profits) Franking Account: $400,000 ( = previous balance + tax levied) The company could pay up to $1,300,000 dividends. Could all these dividends be fully franked dividends? What level of franked dividend is supported by the franking account? As the franking tax credit is calculated as
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This note was uploaded on 09/15/2010 for the course BUSINESS 412 taught by Professor John during the Three '10 term at Queensland Tech.

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EFN412_Topic_06_Reading_and_Tutorial_Guide - EFB307 Finance...

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