This preview has intentionally blurred parts. Sign up to view the full document

View Full Document

Unformatted Document Excerpt

Question 1 Which of the following statements is correct? Answer One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive. If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not follow the strict residual dividend policy. If a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever the firms investment opportunities improve. If Congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios. Despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees. 2 points Question 2 In the real world, dividends Answer are usually more stable than earnings. fluctuate more widely than earnings. tend to be a lower percentage of earnings for mature firms. are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings increased or decreased. are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if EPS = $2.00, then DPS will equal $0.80. Once the percentage is set, then dividend policy is on automatic pilot and the actual dividend depends strictly on earnings. 2 points Question 3 Which of the following statements is correct? Answer Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios. One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like. An increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by MM. If the clientele effect is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price. Stock repurchases make the most sense at times when a company believes its stock is undervalued. 2 points Question 4 If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that Answer the dividend payout ratio has remained constant. the dividend payout ratio is increasing. no dividends were paid during the year. the dividend payout ratio is decreasing. the dollar amount of investments has decreased. 2 points Question 5 You own 100 shares of Troll Brothers stock, which currently sells for $120 a share. The company is contemplating a 2-for-1 stock split. Which of the following best describes what your position will be after such a split takes place?... View Full Document

End of Preview

Sign up now to access the rest of the document