Payout Policy Flashcards

Flashcards covering vocabulary related to payout policy, including dividends, share repurchases, and stock splits.

Payout Policy

The decisions that a firm makes regarding whether to distribute cash to shareholders, how much cash to distribute, and the means by which cash should be distributed.

P&G’s Dividend History

P&G has paid dividends every year for more than a century, and it increased its dividend in every year from 1956–2010.

Open-market share repurchase

A share repurchase program in which firms simply buy back some of their outstanding shares on the open market.

Tender offer repurchase

A repurchase program in which a firm offers to repurchase a fixed number of shares, usually at a premium relative to the market value

Dutch Auction repurchase

A repurchase method in which the firm specifies how many shares it wants to buy back and a range of prices at which it is willing to repurchase shares.

Dividend reinvestment plans (DRIPs)

Plans that enable stockholders to use dividends received on the firm’s stock to acquire additional shares—even fractional shares—at little or no transaction cost.

Ex dividend stock price theory

The stock price should fall by exactly the amount of the dividend.

Growth Firm Dividend Policy

A growth firm is likely to have to depend heavily on internal financing through retained earnings, so it is likely to pay out only a very small percentage of its earnings as dividends.

Constant-payout-ratio dividend policy

A dividend policy based on the payment of a certain percentage of earnings to owners in each dividend period.

Firm’s dividend payout ratio

The percentage of each dollar earned that a firm distributes to the owners in the form of cash. It is calculated by dividing the firm’s cash dividend per share by its earnings per share.

Regular dividend policy

A dividend policy based on the payment of a fixed-dollar dividend in each period.

Target dividend-payout ratio

A dividend policy under which the firm attempts to pay out a certain percentage of earnings as a stated dollar dividend and adjusts that dividend toward a target payout as proven earnings increases occur.

Stock dividend

The payment, to existing owners, of a dividend in the form of stock.

Stock split

A method commonly used to lower the market price of a firm’s stock by increasing the number of shares belonging to each shareholder.

Reverse stock split

A method used to raise the market price of a firm’s stock by exchanging a certain number of outstanding shares for one new share.