FIN 302- FINAl CHEAT SHEET

FIN 302- FINAl CHEAT SHEET - Lecture Notes Set III: Payout...

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Lecture Notes Set III: Payout Policy : How much should a company pay out to stockholders and how much should it retain? A firm’s earnings are either paid out in the form of dividends or retained. What is presumably done with retained earnings? It’s reinvested. 1. Firms with +NPV opportunities can pay dividends and issue new shares (floatation costs) or the firm can retain earnings. Yes, floatation costs. 2. Firms with no +NPV opportunities should disburse their earnings to shareholders. Alternative is holding cash, wasting cash, or investing in the securities of other firms or governments. How do firms disburse cash to stockholders? A. Dividends (can be relatively fixed or relatively variable over time) B. buy back stock ; 2005: 41% of firms pay a dividend. Stock repurchases becoming more common ; Exxon Mobile repurchased $418.28B; Citi repurchased $12.8B, Intel repurchased $10.6B and Cisco repurchased $10.2B. *Dividends are much smoother then stock repurchases bc mgt like to maintain the div lvl over time even if they are loosing $. * What happens with a stock with repurchase? Wouldn’t change, assets dec. bc loss of $ and equity and *SO would dec. How dividends are paid: 1. Dividend set and declared by board of directors 2. Stock goes ex-dividend 3. Payment is made to stockholders on date of record 4. Dividend checks are mailed to stockholders. Timing example: Apr 15: ExxonMobil declares regular quarterly dividends of $.32 per share (Declaration date) May 11:Share trade ex-dividend (Ex-dividend date) May13: Dividends paid to shareholder registered on this date (Record date) June10: Dividend checks are mailed (Payment Date). *You see stock P reaction on declaration date, good/ bad news. Type of dividends : A . Regular cash dividend : quarterly, typically remains relatively constant or gradually increases over time. B. Special dividend : One-time dividend; no expectation of continuation. However, some firms have a history of paying a relatively constant “special dividend” along with a quarterly dividend once-per-year, For these firms, stockholders may develop an expectation of continuity. C. In-kind dividend: (could be a liquidating dividend): Product dividend. I.e., Dundee Crematorium offered discounts to large shareholders. D. Stock dividend: New shares issued by the firm, disbursed as a dividend. Similar conceptually to a small stock split. Exg: a 5% stock dividend will result in the “payment” of 5 additional shares for each 100 shares you already own. Are stock dividends as valuable as other types of dividends? Yes but maintain dividend . Which type of dividend is most similar to a stock repurchase ? Special dividend, (one time cash disbursement) no continuit y Stock Repurchases: Methods: 1. Buy stock in open market, like any other investor 2. Buy back stated number of shares at a fixed price (typically 20% above current market price). 3. Dutch auction : firm states a series of prices at which it will buy back stock. Shareholders submit offers
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FIN 302- FINAl CHEAT SHEET - Lecture Notes Set III: Payout...

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