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Dividends and Payout Policy
The clientele effect lays out the facets of the demand for dividend-paying stocks. Essentially, the demand for the said stocks is influenced by age and the predominant tax bracket for each investor. Those in low tax brackets would prefer to receive dividends since they have lower tax liabilities. Retirees and older investors (in low tax brackets) also favor dividend-paying stocks given their need for cash in the present as opposed to future payments. institutional investors have low marginal tax rates and therefore prefer to invest in dividend-paying stocks. Younger investors and those in high tax brackets would prefer stocks that offer high capital gains as opposed to dividend-paying stocks. These preferences can be explained by their higher risk appetite and the intention to reduce the tax liability.
Modigliani & Miller's theory on dividend policy irrelevance argues that the dividend policy selected by a particular firm has no effect, on its valuation. As such, the company's value is only dependent on its earnings. Therefore, prospective investors' decisions are not affected by the underlying dividend policy. The argument should hold to ensure the independence of the investor in making decisions. Meaning, excess cash from dividends can be reinvested in stocks and deficits in dividend payments can be offset by selling stocks.
The main advantage of paying out dividends or repurchasing shares is the consequent signal effect. On, making such payments, the company signals its ability and willingness to 'repay' investors funds. The payments show that a firm has enough funds to cover the investments made. Share repurchases also lead to an increase in EPS. Share repurchases may be a disadvantage to a firm where it occurs when the share is overvalued. Share repurchases and dividend payments reduce the funds available for reinvestment more so for firms in distress. The years following 1982 recorded an increase in share repurchases and higher dividend payout policies. SEC regulations in 1982 that allowed share repurchases propagated this trend.
Mergers and Acquisitions
Vertical acquisitions occur where the companies involved are in different levels of a production process. Horizontal mergers are undertaken between two companies in the same industry. Vertical mergers are cost-cutting measures meant to smoothen the production process while horizontal mergers seek to increase revenue generation by growing the market share. Vertical mergers help companies to concentrate on producing a particular array of products while horizontal mergers are a diversification strategy meant to expand the product portfolio.
Synergy in mergers refers to the notion that two companies will perform better when they combine their efforts as opposed to when they operate individually. There are different types of synergies. Cost reduction synergies manifest in the resultant economies of scale, technology transfer between the firms and the ability to use complimentary resources. Revenue enhancement synergies expand the market share, help the companies improve their marketing plans and also aids the integration of strategies. Taking advantage of revenue growth from the merger may also form an oligopoly or a monopoly.
tender offers are used by hostile takeovers. The first stage of the offer is to inform the shareholders of the intention to acquire all outstanding stock; this is meant to bypass the target firm's management and board. The second stage involves setting the share price for the target firm and communicating the same to the acquires shareholders. At this point, the said shareholders can either accept or reject the offer. If the offer is accepted by the majority, then the merger can successfully be executed. Otherwise, the target firm can apply the appropriate defensive tactic. The settlement in mergers and acquisitions can be in stock for stock or on the cash basis. In stock-for-stock, the shareholders of the acquiring firm will see the stock price drop due to dilution, on the other hand, the shareholders of the target firm will experience a higher stock price. In cash offers the share price for the acquirer either maintains its position or increases at the same time the value of the target firm shareholders pay tax on capital gains thus receive a lower net value.
The IPO process involves various parties where each is designated with a specific task. The issuing firm is tasked with forming the IPO team particularly the underwriters. The firm is also tasked with providing the documents needed in the process e.g. financial statements. The underwriter's responsibilities include marketing the shares through road shows, certification and registration of the firm's IPO with the SEC, monitoring the process and bearing the risks in the offer process. The SEC receives documents filed by the underwriter and investigates the information to ascertain its credibility.
In the aftermarket both the underwriter and the shareholder should be committed to ensuring that there is information asymmetry for all traders. Insiders should not have unfair advantages over other investors and are prohibited from taking part in insider trading. As such, persons involved with the underwriter or the issuing company cannot sell the new issue to a restricted person.
A rights offer is a process of issuing shares to existing shareholders at a price lower than that prevailing in the market. In the issue, a member can either take up the rights, ignore it or sell it. A right offering has two advantages over a seasoned equity offering through an underwriter. The rights offering is cheaper than the latter and is also fair to shareholders since it allows them to sell the rights in a secondary market. A private equity investor is one who invests in entities that are not listed or trading in the public market. Such investors tend to invest in a startup with high growth potential. Their main goal is usually to invest in firms at their initial growth stages, then allow the firm to grow and finally exit the business on receiving their returns.
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