Ch 14/15 Fundamentals of Financial MGMT

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How does dividend policy affect stock price? (3 Basic Views)
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Terms in this set (22)
How does dividend policy affect stock price? (3 Basic Views)
1) Dividend policy is irrelevant; investors can design
their own dividend policy. If they are not receiving
enough, sell shares. If receiving too much,
repurchase shares. Ignores taxes and transaction costs.

2) High dividends increase the stock price.

Assumes investors are indifferent regarding income versus capital gains. Proponents say dividends now are more certain - "bird-in-the-hand" theory.

3) Low dividends increase the stock price.

Based on the difference in the tax treatment for dividends versus capital gains. Proponents say investors want to maximize after-tax returns, so they prefer capital gains and deferring payment of taxes.
How does dividend policy affect stock price? (4 Other Views)
-Residual Dividend Approach
-Clientele Effect
-Constant Payout Ratio
-Stable dollar dividend per share
"Old Stock" Plan
Stockholders can automatically reinvest their dividends in the stock of the dividend paying corporation. Outstanding shares are repurchased on the open market.
"New Stock" Plan:
Stockholders can automatically reinvest their dividends in the stock of the dividend paying corporation. New shares are issued, therefore new capital is raised.
What is the acronym for "Dividend Reinvestment Plans"
DRIPS
Why do firm's repurchase stock
A. Have the cash and distribute it by buying stock instead of paying dividends.
B. Capital structure may be too heavily weighted with equity; firm sells debt and uses proceeds to repurchase stock.
C. Firm has issued options and may repurchase stock when options are exercised.
3 Types of Repurchases
A. Open market purchases
B. Negotiated purchases
C. Tender Offers
With a 2:1 split, prior to the split you own 100 shares @ $100 per share = $10,000.

After split, you own ___ shares @ $__ per share = $______
200 shares @ $50 per share = $10,000
Why do firms hold cash
1. Transaction Motive - day to day cash transactions
2. Precautionary Motive - in case of less predictable CF's
3. Speculative Motive - take advantage of bargain purchases
4. Compensating Balances - compensating bank for services
Float
difference between balance in firm's checkbook and balance according to bank's records. The time elapsed when a check is written, cleared, and deposited is referred to as float
Disbursement FloatA decrease in book cash but no immediate change in bank cash.Collection FloatExample: "someone sends you a check and it takes 4 days for you to receive and deposit it and for the bank to clear the funds, that's 4 days of collection float" Brigham/ HoustonCollection Float; Processing FloatThe time that elapses between receipt of payment from a customer and the deposit of the customer's check in the firm's bank account; the time required to process customer payments.Collection Float- Mail FloatMail float is the length of time that checks are en route to the firm, either through the postal system or through some sort of electronic transfer.Collection Float-Availability FloatAvailability float is the length of time necessary for a check to clear through the banking system once it's been deposited. The availability float exists because banks have to process physical checks before releasing funds, meaning that the depositor has to wait before funds appears in a bank account.Credit PolicyThe demand for a firm's products or services are primarily determined by prices, product quality, advertising and the firm's credit policy.Credit Periodthe length of time customers are given to pay for their purchasesCredit Discountsgiven for early paymentsCredit Standardsrefers to the financial strength required of credit customersCredit Collection Policyhow aggressively are late payments collectedCurrent Liabilities (Short-term Financing); Unsecured Loans:1. Trade Credit: 2/10, net 30 2. Accrued wages and accrued taxes 3. Bank Loans: a) Line of Credit- less formal; "clean-up" clause b) Revolving Credit Agreement - more formal; legally binds the lender; commitment fees 4. Commercial PaperCurrent Liabilities (Short-term Financing); Secured Loans1. Pledging of A/R's 2. Factoring of A/R's 3. Inventory Loans a. Floating Lien Agreement - lien against all inventory b. Chattel Mortgage Agreement - lien against specific inventory