Exam 16: Payout Policy

Briefly describe an imputation tax system.

The following are indicators that the firm has a cash surplus:. I.Free cash flow is reliably positive. II.The firm has a low debt ratio compared to similar firms. III.The firm has sufficient debt capacity to cover unexpected opportunities or setbacks.

According to behavioral finance, investors prefer dividends because

Healy and Palepu found that the stock price of firms that stopped paying a dividend declined by 9.5 percent on average upon announcement.

A retiree believes that investing in a nondividend paying growth firm, which requires the periodic sale of stock for income, will eventually lead to a loss of all shares. Explain the flaw in this logic.

Firms can repurchase shares in the following ways: I.open market repurchase; II.tender offer; III.Dutch auction; IV.direct negotiation with a major shareholder

In 2009, JPMorgan Chase cut its dividend down to $0.05 per share and the bank's share price increased in response.

Managers try to avoid reducing their stock's dividend.

The Miller and Modigliani dividend irrelevance argument assumes that the firm's investment policy and debt policy are both settled (fixed).

Briefly explain how shareholders are taxed twice in the United States by providing an example.

The rightist position is that the market will reward firms for having

Generally, investors interpret the announcement of a decrease in dividends as

The par value of the outstanding shares is known as

Firms can pay out cash to their shareholders in two ways: cash dividends and stock dividends.

Firms can pay out cash to their shareholders in the following way(s): I.dividends; II.share repurchases; III.interest payments

Which of the following investors has the strongest tax reason to prefer dividends over capital gains?

Companies using a tender offer to repurchase shares typically offer a stock price greater than the current stock price.

What is SEC Rule 10b-18?

Briefly describe the sequence of events of a firm's dividend payment.

Two corporations A and B have exactly the same risk, and both have a current stock price of $100. Corporation A pays no dividend and will have a price of $120 one year from now. Corporation B pays dividends and will have a price of $113 one year from now after paying the dividend. The corporations pay no taxes and investors pay no taxes on capital gains, but pay a 30 percent income tax on dividends. What is the value of the dividend that investors expect corporation B to pay one year from today?