Reading 13
Analysis of Dividends and Share Repurchases
2 modules 31 min
0/2
Exam Focus
The focus of the Level II exam is valuation, so pay close attention to the theories that explain how dividend policy affects company value and the signals investors get from dividend changes. Payout policy is broader than dividend policy as it includes other means (e.g., special dividends, stock repurchases, etc.) by which companies can pay out cash to stockholders. In recent years, firms have announced plans to repurchase record numbers of shares, making this an important and timely topic.
You should have a basic understanding of the factors that affect a firm’s payout policy and be able to analyze the sustainability of dividends using coverage ratios.
Modules
- Module 13.1Theories of Dividend PolicyDescribe the expected effect of regular cash dividends, extra dividends, liquidating dividends, stock dividends, stock splits, and reverse stock splits on shareholders’ wealth and a company’s financial ratios. · Compare theories of dividend policy and explain implications of each for share value given a description of a corporate dividend action. · Describe types of information (signals) that dividend initiations, increases, decreases, and omissions may convey. · Explain how agency costs may affect a company’s payout policy. · Explain factors that affect dividend policy in practice. · Calculate and interpret the effective tax rate on a given currency unit of corporate earnings under double taxation, dividend imputation, and split rate tax systems.16 min · 6 LOS
- Module 13.2Stock BuybacksCompare stable dividend with constant dividend payout ratio, and calculate the dividend under each policy. · Describe broad trends in corporate payout policies. · Compare share repurchase methods. · Calculate and compare the effect of a share repurchase on earnings per share when 1) the repurchase is financed with the company’s surplus cash and 2) the company uses debt to finance the repurchase. · Calculate the effect of a share repurchase on book value per share. · Explain the choice between paying cash dividends and repurchasing shares. · Calculate and interpret dividend coverage ratios based on 1) net income and 2) free cash flow. · Identify characteristics of companies that may not be able to sustain their cash dividend.15 min · 8 LOS