Payout Policy - Corporate Financial Decision Making

This set of vocabulary flashcards covers payout policy concepts including dividend types, payment processes, the M-M Theorem, Australian taxation systems, and share buyback mechanisms.

Dividend per share (DPS)

The dividend dollar amount paid out to shareholders per individual share owned.

Dividend yield

A dividend measure calculated as dividend per share (DPS) divided by the share price: $\frac{\text{DPS}}{\text{Share Price}}$.

Dividend payout ratio

A dividend measure calculated as dividend per share (DPS) divided by earnings per share (EPS): $\frac{\text{DPS}}{\text{EPS}}$.

Regular dividends

Dividends that are expected to be maintained by the firm in the future.

Special dividends

Dividends that are considered less likely to be repeated and are often used to signal that a portion of the distribution is non-recurring.

Solvency test (Australia)

Dividend payment rules introduced in 2010 requiring that assets exceed liabilities before declaration, the payment is fair to shareholders, and it does not prejudice creditors.

Franked dividends

Dividends that carry credits for tax already paid by the company, used to prevent double taxation.

Announcement Date

The day a firm announces its next dividend amount, along with its record and payment dates.

Cum-dividend Date

The last day on which shares are traded with the right to receive the upcoming dividend.

Ex-dividend Date

The first day when shares are traded without the right for the buyer to receive the current dividend.

Record Date (Books Close Date)

The date on which a company identifies its current shareholders to determine who is eligible to receive the dividend.

Dividend Drop-off Ratio

A measure of the share price change on the ex-dividend day relative to the dividend amount: $\frac{P_{\text{cum}} - P_{\text{ex}}}{\text{Dividend}}$.

Modigliani-Miller (M-M) Dividend Irrelevance Theorem

A theorem stating that in perfect capital markets, the value of a firm is independent of its payout policy.

Homemade dividend

An investor's ability to replicate a corporate dividend policy by selling part of their holdings to create cash or reinvesting dividends to increase holdings.

Information Asymmetry

The gap in information between management and shareholders, which leads the market to seek signals from managerial actions like dividend changes.

Agency Costs (Free Cash Flow Problem)

Costs arising when managers with excess cash engage in "Empire Building" through negative NPV projects or perks instead of returning cash to shareholders.

Classical tax system

A system where company profits and dividends are taxed separately, resulting in the double taxation of corporate earnings.

Imputation tax system

A system introduced in Australia in July 1987 that eliminates double taxation by providing shareholders with tax credits for corporate tax already paid.

Grossed-up dividend

The total dividend value including franking credits, calculated as $\frac{\text{Dividend}}{1 - t_{c}}$.

Dividend Reinvestment Plans (DRPs)

Plans that allow shareholders to receive dividends in the form of new shares rather than cash, often at a small discount.

Share Buybacks (Share Repurchases)

A payout method where a corporation purchases its own shares from shareholders, often regarded as the opposite of an equity issue.

10/12 rule

A legal guideline in Australia that generally limits a company to repurchasing up to $10\%$ of its ordinary shares within a $12$-month period.

On-market buyback

The repurchase of shares through normal stock exchange trading where the entire price is treated as capital proceeds.

Selective buyback

A repurchase from a specific, limited number of shareholders requiring approval by more than $75\%$ of non-selling shareholders.

Financial Flexibility

A reason for buybacks over dividends, as dividends are "sticky" long-term commitments, while buybacks allow for non-permanent distributions.