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May 26, 2021 in CFA Level II Study Notes, Corporate Finance by Irene R

Share Repurchases

A share repurchase is a decision by a company to buy back its shares from the marketplace using corporate cash. Hence it can be viewed as a cash dividend alternative. Treasury shares are stocks that have been repurchased to be…

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May 26, 2021 in CFA Level II Study Notes, Corporate Finance by Irene R

Payout Policies

In this section, we shall discuss the three types of dividend policies: Stable Dividend Policy A stable dividend policy is one where the dividends paid do not reflect short-term volatility in earnings. It is the most common because managers are…

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May 26, 2021 in CFA Level II Study Notes, Corporate Finance by Irene R

Tax Systems and Dividend Policy

Double Taxation System Under the double taxation system, earnings before tax (EBT) are taxed at a corporate level and then taxed again as dividends after the earnings are distributed to shareholders. Let us illustrate this in the table below. $$…

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May 25, 2021 in CFA Level II Study Notes, Corporate Finance by Irene R

Factors Affecting Dividend Policy

Some of the factors that affect dividend policy include: 1. Investment Opportunities Other factors are held constant. A company with more profitable investment opportunities will tend to pay fewer dividends than a company with fewer opportunities because the latter has…

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May 25, 2021 in CFA Level II Study Notes, Corporate Finance by Irene R

Effect of Agency Costs on Payout Policy

Agency Costs and Dividends When shareholders and managers are two separate parties, managers may have an incentive to maximize their welfare at the company’s expense by choosing negative NPV projects that expand a managers’ span of control but generates negative…

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May 24, 2021 in CFA Level II Study Notes, Corporate Finance by Irene R

The Information Content of Dividend Actions: Signaling

Modigliani and Miller assumed that both inside and outside investors have similar information about a company. However, in reality, outside investors have less detailed information about a company relative to the managers. Outsiders may use dividend signals to get more…

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May 24, 2021 in CFA Level II Study Notes, Corporate Finance by Irene R

Theories of Dividend Policy

Dividend policy dictates the amount and timing of dividend payments. Two groups of financial theorists have different opinions on the dividend policy, with one group claiming that the dividend policy is irrelevant to shareholders. In contrast, another group claims that…

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May 24, 2021 in CFA Level II Study Notes, Corporate Finance by Irene R

Types of Dividends

A dividend is a distribution of profits paid to shareholders. The payment of dividends to shareholders is not a company’s legal obligation, and they are subject to different tax treatment for both the shareholder and the company. A payout policy…

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May 15, 2021 in CFA Level II Study Notes, Corporate Finance by Irene R

Leverage in an International Setting

The general business environment may differ from one country to another, and these country-specific factors have a significant impact on determining a company’s capital structure. Taxes, regulations, and traditions can explain the different degrees of leverage in the two countries….

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May 15, 2021 in CFA Level II Study Notes, Corporate Finance by Irene R

Effects of Capital Structure Policy

When evaluating the capital structure of a company, an analyst must consider the following: The capital structure of the company over time. The financial analyst can evaluate the company’s ability to handle its financial obligations, considering the industry the company…

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