Corporate Issuers

Liquidating Dividend

when whole or part of the firm is sold; dividends paid in excess of retained earnings; return of capital rather than return on capital

Dividend Irrelevance Theory

dividend policy is irrelevant

MM: assumes perfect markets; no corporate taxes, bankruptcy costs, transaction costs

Dividend Preference Theory

suggests that investors prefer the certainty of a cash dividend over the uncertainty of a stock price increase (bird-in-hand argument)

Result → higher dividends lead to higher stock prices (lower cost of equity)

Tax Aversion Theory

investors prefers small dividend payments to large payments bc capital gains are sometimes taxed at a lower rate and not taxed until realized

Result→ smaller dividens result in higher stock price and lower cost of equity

Double Taxation

US tax rules are based on this

Imputation System

effective tax rate = shareholder’s tax rate

Stable Dividend Policy

dividends are constantly paid

Constant Dividend payout ratio

proportion of earnings; fluctuates w/ earnings; short term

Target Payout Adjustment Model

proportion company intends to pay in long term

Open Market Repurchase Method

flexible, allows the company to time the repurchase and buy when the price is attractive (used almost exclusively outside North America)

Fixed Price Tender Offer Repurchase Method

offers premium over market price, quick execution, shareholders not selling are at a disadvantage, pro rata acceptance in case a higher-than-needed # of shares are tendered

Dutch Auction Repurchase Method

specifies a range of prices, invites bids and accepts lowest bid first, and continues until target achieved; all sellers receive the highest accepted bid price; cheaper than fixed price tender but slower

Direct Negotiation Repurchase Method

with a single large holder; common in greenmail transactions

Concentrated Ownership & Concentrated Voting Power

a single shareholder or a group of shareholders have control over the corporation

principal - principal problem is a concern

Concentrated Ownership & Dispersed Voting Power

principal - agent problem, occurs due to voting caps

Dispersed Ownership & Dispersed Voting Power

principal - agent problem

Dispersed Ownership & Concentrated Voting Power

Principal - principal; control is via pyramid structures or dual class shares

“Comply or Explain” provision

requires firms to follow best practices or explain why not

Stewardship Codes

seek to engage investors in corporate governance by exercising their legal rights

Weighted Average Cost of Capital (WACC)

cost of debt and equity capital that finance a company’s assets

Historical (ex post) approach

estimates the ERP using backward looking historical data

Weaknesses: surviorship bias, rely on ERP being stationary

Forward-looking (ex ante) approach

uses forward looking data based on expectations

• Survey-based estimates

• Dividend Discount Model

• Macroeconomic Modeling

Grinold-Kroner Model

Estimates ERP using five factors:

• dividend yield

• real GDP growth rate

• inflation

• long-term government rate or Rf

• growth in shares outstanding

Country Spread Model

estimates a country risk premium (CRP) for specific emerging market

Sovereign yield spread can be used as an estimate of CRP

ICAPM

two factor model based on global market index (e.g. MSCI All Country World) and a wealth-weighted index in a foreign currency

Restructuring Action: Investment

increases business size and / or scope; to increase revenues and improve margins

Restructuring Action: Divestment

decreases size and/or scope of business; shedding slow growing, low profit, high risk segments

Restructuring Action: Restructuring

improve performance w/ same scope; increase growth, improve profitability, or reduce risks

Industry Shocks

corporate restructuring tends to have industry specific waves; industry mergers are often followed by more mergers

High Security Prices

driver of corporate restructuring; explanations for economic cyclicality of corp transactions:

• Greater CEO confidence

• Lower cost of capital

• Overvalued Stock

Sale Leaseback

asset owner sells an asset to a lessor for cash and immediately signs a lease agreement for its use

Dividend Recapitalization

reducing WACC by increasing debt through debt-financed dividends or share repurchases

Leveraged Buyouts

combination of the investment, divestment, and restructuring

Comparable Company Analysis

use the valuation multiples of similar, listed companies to value a target

Comparable Transaction Analysis

similar to company analysis, but uses multiples from historical acquisitions

Estimated Takeover Premium

the amount by which the per share takeover price exceeds the unaffected price, expressed as a % of the unaffected price