Capital Structure

Question 1

Explain “Regular cash dividends”

Answer 1

1. Periodic cash dividends paid to shareholders.

2. Companies try to keep dividends stable or growing slowly.

Question 2

Explain DRPs

What are the two types

Answer 2

1. Companies have DRPs
2. Shareholders may request reinvestment of dividends
3. Open Market DRP
4. New issue DRP (scrip in uk)

Question 3

Give 3 advantages of DRP for the Company

Answer 3

1. Diverse shareholder base - smaller shareholders can cost effectively accrue shares
2. Promote long term investment
3. New Issue DRP raises new capital without floatation or sevondary offering

Question 4

Give 3 advantages of DRPs for shareholders

Answer 4

1. No transaction costs
2. Cost averaging
3. Often at a discount

Question 5

Give 3 disadvantages of DRPs for shareholders

Answer 5

1. Additional tax records
2. Cost averaging may mean buying at higher than market average
3. Tax is due in the year the dividend is paid even if it is reinvested in stock