İŞLETME FİNANSI II - Deneme Sınavı - 7

Target payout ratio is the percentage of net income paid out as cash dividends.

The company will pay the dividend only to the registered shareholders of record on a specific date which is called record date.

Therefore, the date two business days before the date of record is called ex-dividend date.

There are four types for stock repurchases;

1. Open-market repurchase. The company makes a public announcement to buy back its own share of stock in the open market that is the most common method. There exist certain daily buy-back limits on the number of shares in open market share repurchases. For instance, the SEC Rule 10b-18, introduced in 1983, dictates that the company cannot repurchase more than 25 % of the average daily trading volume in the US.

2. Tender Offer. The company can repurchase a number of shares through a tender offer in which it offers to buy shares at a specified price.

3. Dutch auction. The company specifies a price range that it is willing to pay, and shareholders offer how many shares they are willing to sell at that specific price range. The company then buys shares from the lowest priced offers. If there are not enough shares offered at the lowest price to accomplish the desired buy-back, the issuer may accept offers from the next higher priced.

4. Targeted Repurchase. The company can repurchase a block of shares at a negotiated price from major shareholders. The most important example is greenmail transactions, in which the shares are repurchased at a large premium over the current market price.

Targeted Repurchase. The company can repurchase a block of shares at a negotiated price from major shareholders. The most important example is greenmail transactions, in which the shares are repurchased at a large premium over the current market price.

The principal advantages of repurchases are as follows;

1. A company can repurchase stock to distribute excess cash without changing the amount of dividends. Because managements are reluctant to increase the dividends unless management is confident in the future. Also, they are reluctant to decrease the dividend because of the negative signal.

2. When a company has more equity than its target capital structure, the company can directly change its capital structure by repurchasing. For instance, a company may issue debt and use the proceeds to repurchase stocks for adjusting its capital structure.

3. A company can repurchase stock to minimize the “dilution effect” associated with exercising the stock options that have been given to employees as bonuses.

4. Due to the signaling effects, stock repurchase is perceived as a positive signal that the company’s stock is undervalued in the financial markets; therefore when a company engages in the stock repurchase, investors prefer to purchase additional shares.

5. Repurchases have a tax advantage over dividends due to the deferred tax on capital gains.

The company will pay the dividend only to the registered shareholders of record on a specific date which is called record date. While registration takes three business days, anyone purchasing the company’s stock at least three business days before the date of record can claim the right to receive the dividend. Therefore, the date two business days before the date of record is called ex-dividend date.

Merton Miller and Franco Modigliani (1961) (MM) argued that while dividend policy does not have any impact on either the value of the company’s stock and its cost of capital, the value of the company is determined only by the earnings power and risk of its investments ( Merton H. Miller and Franco Modigliani, (1961) ). This is called a dividend irrelevance theory set in a perfect world where

(1) investors can buy and sell stocks without any transaction costs,

(2) companies can issue stocks without any costs,

(3) there are no taxes and transaction costs,

(4) the markets are perfectly efficient,

(5) investors are completely rational and

(6) there are no conflicts of interest between managers and owners.

Ross (1977) and Bhattacharya (1979) initiated the dividend signaling hypothesis, also called, dividend information content hypothesis stating that if there is a larger than expected dividend increase, it signals to investors that managers anticipate bright future prospects of the company. On the contrary, if the dividend decreases or it is less than expected, it signals to investors that managers forecast poor future earnings. In another words, as a dividend rise conveys confidence to investors, a dividend cut conveys a lack of confidence.

Ownership dilution: A company may retain more earnings rather than selling new stocks if management is concerned about maintaining control.

Target distribution ratio is the percentage of net income distributed to the shareholders through cash dividends or stock repurchases

Companies can pay out cash to shareholders through cash dividends and stock repurchases.

Buyers of stock on or after ex-dividend date do not receive dividend

Stock repurchases are implemented especially when the stock price is considered as not overvalued but undervalued.

All the given types are for stock repurchases.

The most important example for targete repurchase is greenmail transactions.

Stock split is an action taken by a company to increase the number of shares outstanding.

All of the given theories are among the theories of investor preferences for dividend yield versus capital gains.

One of the assumption of the theory is "the markets are perfectly efficient".

Clientele effect is a tendency of a company to attract a set of investors whose particular needs for current versus future cash flow match with company’s dividend payouts.