ACST252 Study Guide - Final Guide: Dividend Imputation, Cash Flow, Dividend Policy
11 May 2018
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Glossary
• Adverse Selection (Lemon Problem): Bad quality pushes good quality from the market because of an
information gap. Buyers cannot spot the quality difference, so there will be only one market price for all,
which is below the price required by the good companies. So they will exit the market, leaving only lower
quality companies (lemons)
• Appropriation is the act of setting aside money for a specific purpose.
• Asset - set of cash flows payable in the future
• Attachment date: the date from which the insurer accepts the risk
• Beta Coeffiiet Is a ide of the degee of oeet of a assets etu i espose to a hage i the
market return. It measures non-diversifiable risk.
• Book Value: The net value of an asset shown on the fis Balae “heet.
o Installed Cost – accumulated depreciation
• Break even net cash inflow: The minimum level of cash inflow necessary for a project to be acceptable.
• Business ethics are the standards of conduct or moral judgment that apply to persons engaged in commerce.
• Cannibalisation: negative impact of a company's new product on the sales performance of its existing and
related products. It refers to a situation where a new product "eats" up the sales and demand of an existing
product, potentially reducing overall sales, even if sales of the new product are increasing.
• Capital - Long term sources of funds
• Capital budgeting is the process of evaluating and selecting long-te iestets osistet ith the fis
goal of maximising owner wealth.
o The accept–reject approach involves evaluating capital expenditure proposals to determine whether
the eet the fis iiu aeptae iteio. This appoah a e used he the fi has
unlimited funds, as a preliminary step when evaluating mutually exclusive projects, or in a situation
in which capital must be rationed. In these cases, only acceptable projects should be considered.
o The second method, the ranking approach, involves ranking projects on the basis of some
predetermined measure such as the rate of return. The project with the highest return is ranked
first, and the project with the lowest return is ranked last. Only acceptable projects should be
aked. ‘akig is useful i seletig the est of a goup of utuall elusie pojets ad in
evaluating projects with a view to capital rationing.
• Capital Expenditure: an outlay of funds by the firm that is expected to produce benefits over a period of time
greater than one year.
• Capital expenditure: outlay of funds by the firm that is expected to produce benefits over a period of time
greater than one year.
• Cash Flows:
o Opeatig Cash Flos: ash flos dietl elated to the podutio ad sale of a fis poduts ad
services.
o Investing Cash Flows: cash flows associated with the purchase and sale of non current assets and
business interests.
o Financing Cash Flows: cash flows that result from debt and equity financing transactions.
• Cash Offer: the new shares are issued to the public for cash, which results in a reduction of the proportional
ownership of existing shareholders (i.e., dilution).
• Change in net working capital: the difference between the change in current assets and the change in
liabilities. If it is positive, it is an initial outflow. If it is negative, it is an initial inflow. It is not taxable. At the
ed of the pojets life, the oeall et working capital is recovered as a cash inflow.
• Clientele effect: The theory that a firm will attract shareholders whose preferences with respect to the
paet ad stailit of diideds oespod to the fis paet patte ad stailit of diideds.
• Coefficient of variation, CV, is a measure of relative dispersion that is useful in comparing the risk of assets
with differing expected returns. The real utility of the coefficient of variation is in comparing assets that have
different expected returns.
• Common-size income statement presents all of the income statement amounts as a percentage of net sales
(divide each item from the income statement by the net sales). This allows easy identification of relationship
between specific revenues and expenses to be evaluated. It is also useful in comparing performances across
years.
• Cost of capital is the opas epeted aeage futue ost of fuds oe the log u (weighted average),
and the minimum rate of return a firm must earn on its project investments to maintain market value of
shares and attract investors. i.e. the rate of return required by investors.
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• Covenants: Restrictive clauses in a bond contract that limit the issuer from taking actions that may undercut
its ability to repay the bonds.
• Date of eod diideds: “et the fis dietos, the date on which all persons whose names are
recorded as shareholders receive a declared dividend at a specified future time.
• Debenture - a long-term security yielding a fixed rate of interest, issued by a company and secured against
assets.
• Depreciation is the systematic charging of a portion of the costs of non-current assets against annual
revenues over the expected useful life of an asset.
• Derivative Security: A security that is neither debt nor equity but derives its value from an underlying asset
that is often another security. E.g. options
• Direct Lease: Where the lessor owns or acquires the asset under lease.
• Diversification - Combining assets with low or negative correlation to reduce the overall risk of the portfolio
• Dividend imputation system: Dividend imputation is a provision to make dividend income subject to one levy
of tax. It permits shareholders to offset tax already paid on dividends at the corporate level against personal
taxes. Companies allocate this tax to resident shareholders by means of imputation credits attached to their
dividends. Such dividends are known as franked dividends—paid out of company income on which corporate
tax has been paid. These dividends, together with the imputation credits, are included in the assessable
income of resident individual shareholders and are taxed at their marginal rates. The shareholder is entitled
to a rebate of tax equal to the amount of the imputation credit. Because there is a discrepancy between the
top personal tax rate and the company rate on franked dividends, top marginal taxpaying shareholders will
never eliminate their tax liability on franked dividends.
• Dividend Relevance:
o Dividend Irrelevance Theory: Modigliai ad Milles theo that diided poli is ieleat, ad
dividends have no effect on a company's capital structure or stock price. The value of a company is
determined solely by the earning power and risk of its assets (investments). E.g. if dividends are too
big, investors can buy more stock with additional dividend, or vice-versa. So, dividends are irrelevant
to iestos etus.
o Dividend Relevance Theory: Gordon and Lintners theo that diideds ae eleat, ad there is a
diet elatioship etee a fis diided poli ad its aket alue.
▪ Bird-in-the-hand argument: The belief that investors see current dividends as less risky than
future dividends or capital gains.
• Dupot “ste of Aalsis: This is a faeok fo dissetig the fis fiaial stateets ad assessig
its financial condition by examining each key aspect of performance. It allows the firm to dissect return on
equity into three components: profit on sales, efficiency of asset component, and use of leverage
component. merges the Income Statement & Balance Sheet into two summary measures of profitability
(ROA & ROE)
• Earned premium: the number of total premiums collected by an insurance company over a period that have
been earned based on the ratio of the time passed on the policies to their effective life.
• EBITDA - Earnings before interest, tax, depreciation and amortization is a measure of a company's operating
performance. Essentially, it's a way to evaluate a company's performance without having to factor in
financing decisions, accounting decisions or tax environments. But, many judgmental issues remain in the
calculation of this figure. For example, cost of goods sold and operating expenses.
• Efficient portfolio: maximises return for a given risk level or minimises risk for a given level of return.
• ex-dividend: The period beginning four business days prior to the date of record during which a share will be
sold without the right to receive the current dividend.
• Exercise price: share price stipulated on the warrant.
• Fair value - is a market based measurement, not an entity specific measurement that aims to estimate the
price at which an orderly transaction to transfer the asset/liability would take place between market
participants at the measurement date under current market conditions.
• Flotation Costs: The costs of issuing and selling a security. Flotation costs consist of two components:
underwriting costs and administrative costs
• Free cash flow (FCF) represents the amount of cash flow available to investors—the providers of debt
(creditors) and equity (owners)—after the firm has met all operating needs and paid for investments in net
non-current assets and net current assets.
• General Insurance: Typically for losses associated with theft, storms, vehicle accidents, fire and flood
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Document Summary
Glossary: adverse selection (lemon problem): bad quality pushes good quality from the market because of an information gap. Buyers cannot spot the quality difference, so there will be only one market price for all, which is below the price required by the good companies. It measures non-diversifiable risk: book value: the net value of an asset shown on the fi(cid:396)(cid:373)(cid:859)s bala(cid:374)(cid:272)e heet. This app(cid:396)oa(cid:272)h (cid:272)a(cid:374) (cid:271)e used (cid:449)he(cid:374) the fi(cid:396)(cid:373) has unlimited funds, as a preliminary step when evaluating mutually exclusive projects, or in a situation in which capital must be rationed. In these cases, only acceptable projects should be considered: the second method, the ranking approach, involves ranking projects on the basis of some predetermined measure such as the rate of return. The project with the highest return is ranked first, and the project with the lowest return is ranked last. If it is positive, it is an initial outflow. If it is negative, it is an initial inflow.
