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Ratios 1. A firm earned $100 million in net income last year. It paid $40 million in cash dividend and repurchased stocks worth $20 million. Calculate the following: a. Payout ratio = 40% b. Repurchase ratio = 20% c. Distribution ratio = 60% d. Retention ratio = 40% Dividend payout 2. In the real world, we find that dividends a. Are usually more stable than earnings. b. Fluctuate more widely than earnings. c. Tend to be a lower percentage of earnings for mature firms. d. Are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings went up or down. e. 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.” Dividend payout 3. Which of the following would be most likely to lead to a decrease in a firm’s willingness to pay dividends? a. Its earnings become less stable. b. Its access to the capital markets increases. c. Its R&D efforts pay off, and it now has more high-return investment opportunities. d. Its accounts receivable decreases due to a change in its credit policy. e. Its stock price has increased over the last year by a greater percentage than the increase in the broad stock market averages. CHAPTER 14 DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE REPURCHASES
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Dividend theories 4. Which of the following statements about dividend policies is CORRECT? a. Modigliani and Miller argue that investors prefer dividends to capital
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This note was uploaded on 10/20/2008 for the course FIN 301 taught by Professor Rj during the Spring '08 term at Univ. of Massachusetts Med. School.

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