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8 Cards in this Set
- Front
- Back
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What are stock splits? What impact do they have on investors? Why do firms perform stock splits? |
Stock splits have little effect on existing shareholders. For example, a two-for-one split doubles the number of existing shares authorized, issued and outstanding, and will likely cause the market price to fall in half of the previous market price. They are typically used to obtain a price in a target range that will entice investors and prevent odd-lot problems that may be associated with high-priced shares. |
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What are reverse splits (or consolidations)? Why are they done? |
Reverse splits occur when shares are trading at a value that may be unattractive to investors because it is too low. |
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What are extra (or special) dividends? |
Extra dividends are those that may arise due to unusually favourable circumstances and cannot be assumed to persist into the future. Extra dividends should only be included in the calculation of a firm's dividend yield if there is strong evidence that they will be paid again. |
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Differentiate between the dividend record date, the ex-dividend date, cum dividend and ex dividend. |
Payments are made to shareholders on the dividend record date. The ex-dividend date is set at the second business day before the record date, and shares trade without the right to the associated dividend on and after this date. This ensures that a purchaser of the share three days before the record date would settle before the record date. Shares are said to be trading cum dividend up to the ex-dividend date, and trade ex-dividend thereafter. This will be reflected in the share price, which typically falls by an amount close to the dividend amount on the ex-dividend date. |
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What are dividend reinvestment plans (DRIPs)? How do they work? |
DRIPs reinvest shareholders' dividends to purchase additional shares for them; although the shareholder is taxed as if they had received the actual cash dividends. In effect, these plans provide investors with an automatic savings plan that has the advantage of using dollar cost averaging. The shares are typically purchased through the open market by trustees, and the plan permits the purchase equivalent of fractional shares. Variations allow investors to contribute additional cash amounts to the plan and/or provide for the purchase of treasury shares at pre-specified discounts from the open market prices. |
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What are stock dividends? Why are they offered? |
Stock dividends may be offered when the firm wishes to preserve cash. They give the shareholder ownership of additional shares, which are taxed the same as cash dividends. |
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What kind of voting privileges are common shareholders entitled to? |
Shares may be normal voting, multiple voting, non-voting, subordinate voting, or restricted voting. Restricted voting shares are protected by certain rights and regulations to ensure their position is not abused. |
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Describe the favourable tax treatment afforded to common shareholders. |
1. Federal and provincial tax dividend credits, which reduce the effective tax on dividend income. 2. Capital gains exemptions, which exempt 50% of capital gains from taxation. 3. Stock savings plans, which entitle residents of several provinces to deduct up to specified annual amounts from the cost of certain stocks purchased in the respective process. |
