Payout Policy: Dividends and Share Repurchases

To manage financial risk or speculate on price movements using derivatives.

Intrinsic value is the difference between the asset price and strike price for in-the-money options.

Call options provide the right to buy an asset, while put options offer the right to sell an asset.

<p>The underlying asset price, strike price, time to expiration, risk-free rate, and volatility.</p> Signup and view all the answers

<p>Time value reflects the additional worth from the possibility of the option increasing in value before expiration.</p> Signup and view all the answers

<p>The right to terminate a project if it becomes unprofitable.</p> Signup and view all the answers

<p>Options can protect against unfavorable price movements in underlying assets.</p> Signup and view all the answers

<p>The Black-Scholes formula is used to calculate the current value of options based on various parameters.</p> Signup and view all the answers

<p>A favorable interest rate lowers the cost of debt, making it more attractive for a company to increase leverage for financing projects.</p> Signup and view all the answers

<p>The company can assess financial distress risk by analyzing its cash flow stability and existing debt obligations to ensure it can meet increased repayments.</p> Signup and view all the answers

<p>The tax shield is the reduction in taxable income resulting from interest payments on the debt, which can be calculated as the interest expense multiplied by the tax rate.</p> Signup and view all the answers

<p>A company should consider dividends when it has stable earnings and wants to attract income-seeking investors, ensuring consistent shareholder returns.</p> Signup and view all the answers

<p>Share repurchases can increase earnings per share (EPS), help boost share prices, and signal to the market that the company believes its stock is undervalued.</p> Signup and view all the answers

<p>A tender offer allows a company to buy back shares at a premium directly from shareholders, which can generate faster and more sizeable repurchases.</p> Signup and view all the answers

<p>Understanding investor preferences allows the company to align its payout strategy with shareholder desires, such as favoring dividends for income or repurchases for capital gains.</p> Signup and view all the answers

<p>A company should evaluate cash availability, shareholder tax implications, and the expected impact on share price before deciding on a payout method.</p> Signup and view all the answers

<p>The primary steps include evaluating financing needs, assessing current capital structure, considering market conditions, analyzing trade-offs, and deciding on a financing mix.</p> Signup and view all the answers

<p>Tax benefits of debt influence financing decisions by offering tax savings from interest payments, which can lower the overall cost of capital.</p> Signup and view all the answers

<p>High levels of debt can lead to financial distress, increased risk of bankruptcy, and higher costs of capital due to perceived risk by investors.</p> Signup and view all the answers

<p>Factors include potential tax savings, the impact on financial risk, current levels of debt and equity, and market conditions.</p> Signup and view all the answers

<p>Payout policy refers to the strategies companies use to distribute earnings to shareholders, typically through dividends or share buybacks.</p> Signup and view all the answers

<p>Assessing market conditions like interest rates, investor sentiment, and volatility helps determine the feasibility and costs of different financing options.</p> Signup and view all the answers

<p>Real options in capital budgeting represent the flexibility managers have in making future investment decisions that can positively affect cash flows and risk.</p> Signup and view all the answers

<p>The option to delay allows a company to wait for more favorable market conditions before committing to an investment.</p> Signup and view all the answers