Definitions
Which date determines who receives the dividend?
Record date
What happens to stock price on the ex-dividend date?
It drops by roughly the dividend amount
In perfect markets, does payout policy affect firm value?
No
Why are dividends often less attractive than capital gains?
They are usually taxed more heavily
What does a dividend increase usually signal?
Strong future earnings expectations
What is a stock dividend?
Dividend paid in shares instead of cash
Do dividends make shareholders richer? Why?
No—wealth doesn’t change, only its composition
Name one assumption behind MM dividend irrelevance.
No taxes / no transaction costs / no agency problems
What is the main advantage of capital gains taxation?
Taxes can be deferred
Why is a dividend cut often seen as bad news?
Signals weaker future earnings
What is a special dividend?
One-time large dividend paymen
How do you calculate dividend yield?
Dividend / Price
What trade-off exists when a firm increases dividends?
Higher current dividends → lower future dividends
What is the dividend puzzle?
Firms pay dividends despite tax disadvantage
Why is dividend signaling credible?
Weak firms cannot sustain high payouts
When does a stock start trading without dividend rights?
Ex-dividend date
What does the payout ratio measure?
Percentage of earnings paid as dividends
Why are investors indifferent between dividends and capital gains?
They can replicate payouts themselves
Which investors tend to prefer dividends?
Low-tax or income-focused investors
What does a share repurchase signal?
Stock is undervalued
What is a liquidating dividend?
Return of capital when a firm is terminated
What are the two components of stock return?
Dividend yield + price appreciation
Explain “homemade dividends” in simple terms.
Investors can sell shares or reinvest to create desired cash flow
If dividend taxes increase, what should firms do in theory?
Pay fewer dividends / use share repurchases
What does a share repurchase signal?
Undervalued stock