Corporate Finance Dividend Policies

There is no guarantee that independent directors will provide completely independent oversight. CEOs may find ways to influence them.

The Executive Committee is a smaller group of directors empowered to make quick decisions between regular board meetings.

The Audit Committee typically meets seasonally, often tied to the end of the fiscal year.

The Governance Committee primarily handles board recruitment and assessment.

The Finance Committee is responsible for managing the annual budget.

The Program Committee focuses on long-range planning and oversight of the organization.

Managers might use their control to divert cash flow for their own benefit, potentially expanding the firm beyond its optimal size.

Managers can create situations where they are difficult to replace, often by making investments that benefit them personally but may not be in the best interest of the company.

The portion of earnings that a company keeps after paying dividends. Calculated as 1 minus the payout rate.

The percentage of earnings that a company distributes to shareholders as dividends. Calculated as Dividends / Net Income.

When a company buys back its own shares from the open market. An alternative way to distribute cash to shareholders instead of dividends.

The annual dividend per share divided by the stock's current market price. Represents the percentage return an investor gets from dividends.

The system of rules, practices, and processes that guide a company's operations and ensure accountability to stakeholders. It balances the interests of shareholders, management, customers, and the community.

A board member with no material relationship or financial ties to the company. They provide an objective perspective.

The presiding officer of the board of directors. Oversees board meetings, ensures shareholder interests are met, acts as a link between the board and management, and represents the company externally.

A reduction in dividend payments, often seen as a sign of financial trouble or a shift in company strategy.

A contract that provides a company's senior executives with substantial financial benefits if they are terminated due to a takeover or merger.

A strategy employed by a company to discourage hostile takeovers by making it more difficult for other companies to acquire them.

A CEO who has received significant recognition and awards in the business press, but may experience changes in behavior like underperformance and increased compensation.

A law passed in 2002 to protect investors from corporate fraud and accounting scandals. It imposed stricter regulations on public companies, auditor independence, and financial reporting.

Before SOX, auditors could perform both audit and consulting work for the same company, leading to conflicts of interest. SOX restricted this, emphasizing auditor independence.

The increase in value when a cash-rich company with few investment opportunities merges with a cash-poor company with many profitable opportunities. The merger allows projects to be pursued that would have been rejected otherwise due to lack of funds.

The value of cash slack synergy is determined by the net present value (NPV) of the projects that can be undertaken after the merger. This NPV represents the additional value generated by combining the companies.

Mergers can create tax benefits when one company has unused tax deductions and the other has taxable income. The combined entity can use the deductions to reduce the overall tax burden.

In some mergers, the acquired company's assets can be written up to reflect their fair market value. This increased asset value leads to higher depreciation expense, resulting in tax savings.

To estimate the tax benefit from an acquisition, multiply the acquired company's net operating loss (NOL) by the acquirer's tax rate. This calculation provides an estimate of the tax savings from utilizing the NOL.

If the acquirer has limited taxable income, the maximum tax benefit from an acquisition is capped by the amount of taxable income. The acquirer cannot realize tax savings that exceed their taxable income.

The value of tax benefits from an acquisition should be considered when determining the premium paid. If the tax benefit is substantial, it may justify paying a premium above the acquired company's market value.

Companies with improved internal controls, thanks to SOX, experience lower borrowing costs, often by 50 to 150 basis points. This means they can borrow money at a cheaper rate.

SOX Section 806, also known as the whistleblower provision, protects employees who report violations within their company from retaliation. It's illegal for the company to take action against them for speaking up.

While only systemic risk ideally affects stock volatility, overall volatility can matter due to diversification costs (cost of buying into different stocks), potential financial distress, and challenges associated with financing.

Hedging is a risk management technique used by firms to reduce their exposure to fluctuations in prices or other factors that can impact their bottom line.

This type of hedging involves using derivatives, which are contracts that derive their value from an underlying asset like stocks or commodities. It's a way to control risks related to financial assets.

Operational hedging involves making strategic decisions within the company to manage risks. This could involve sourcing materials from different suppliers, diversifying products, or shifting production to a different location.

A risk profile is a visual representation showing how a firm's value might change based on fluctuations in market prices. A steeper slope indicates a larger exposure to risk and potentially a greater need for hedging.

A forward contract is an agreement to buy or sell an asset at a predetermined price on a future date. It's customizable to the buyer and seller's needs. A long position is agreeing to buy, while a short position is agreeing to sell.

Valuing synergy effectively involves considering the combined firm's value, factoring in costs, timing, and integration challenges, and holding individuals accountable for delivering the expected benefits.

Cash acquisitions provide the acquirer with full control of the target company, as they don't need to issue shares and dilute their ownership.

Strategies used to acquire a company against the target company's management's wishes, often involving open market purchases, tender offers, or proxy fights.

Valuing M&A deals involves analyzing incremental cash flows generated by the combined company, using an appropriate discount rate, and considering transaction costs.

Overpaying for a target company can significantly impact the acquirer's value and lead to financial losses. The Winner's Curse highlights this risk.