Exam 16: Dividend Policy

Assume that investors' have a 10% required rate of return on MTA stock. According to the Modigliani and Miller dividend indifference theorem, if investors could choose between a $1.00 dividend today and $1.10 dividend one year from today

As a firm's investment opportunities increase, the dividend payout ratio should increase.

Which of the following is a reason that a company would repurchase its own shares of stock in the market?

Unexpected dividend changes would cause investors to reassess their perceptions about a firm's stock.

What is meant by "dividend clienteles"? Give specific examples.

The residual dividend theory indicates that a firm would never pay dividends unless the firm's profits were larger than its equity financing needs.

According to the residual theory of dividends

M. Camus bought 1000 shares of Oran Co. at $60 per share and 100 shares of Gitane Co. at $40 per share. Both stocks are now worth $50 per share. Both companies have offered to repurchase their shares. If M. Camus would like to have about $5,000 in cash, should he sell the Oran or Gitane?

Paxton Storage Systems is offering shareholders a choice between a $1.00 dividend or the opportunity to sell the stock back to the company for $20 per share. Dr. Gilbert owns 1000 shares, purchased at $20 per share and wonders if there is any difference between taking the dividend for $1,000 or selling 50 shares at $20 per share. She would have to pay a 15% tax on either capital gains or dividends.

The residual dividend theory suggests that dividends should be paid to stockholders first, and then, what is left can be reinvested by the firm.

In 2013, Apple Computers decided to raise a large amount of money by selling bonds (previously the company had little or no debt) and use the proceeds to repurchase billions of dollars worth of the company's stock. The decision was made after Apple stock lost more than 40% of its value in a six month period when most stock prices were rising. What were the company's intentions.

Which of the following is more true of repurchase offers than of cash dividends?

Stock D will pay a $1.00 dividend tomorrow morning and will pay $1.00 dividends at the end of each of the next 2 years. At the end of year 2, stock D will be worth $29. Stock R, on the other hand, pays no dividend, but will be worth $32.31 at the end of year 2. If the investor's required rate of return is 10%, then stock D is worth ________ right now and stock R is worth ________.

Firms can use stock repurchases as a dividend substitute.

For New York Stock Exchange listed companies, a stock dividend exceeding ________ has been defined as a stock split.

Why has the popularity of stock repurchases been growing faster than the cash dividends as a method for companies to distribute cash to their stockholders.

Reducing dividends will usually have a negative impact on the stock price.

Dividends per share divided by earnings per share (EPS) equals the dividend retention date.

Managers are prohibited from using dividend changes and repurchase offers to communicate information concerning their future expectations concerning the firm's cash flows.

Under what conditions would the Modigliani and Miller dividend indifference theorem be literally true.