Group 5 A5 T5 10

Group 5 A5 T5 10 - Chapter 18 Questions 18-1 Define each of...

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Chapter 18 Questions: 18-1) Define each of the following: a. Optimal Distribution Policy: is to strike a balance between a firms cash dividends and its capital gains so as to maximize the stock price b. Dividend irrelevance theory: The dividend policy has no effect on either the price of a firms stock or its cost of capital; due to this it would be irrelevant. Bird-in-the hand theory: Dividends are preferred meaning that investors value a dollar of expected dividends more highly than a dollar of expected capital gains because the dividend yield component is less risky than the expected capital gain Tax preference theory: Capital gains are preferred for two reasons which favor how capital gains are treated in comparison to dividends based on this theory a (1) due to time value effects, a dollar of taxes paid in the future has a lower effective cost than a dollar paid today (2) if a stock is held by someone at their death, no capital gains tax is due at all, therefore the beneficiaries of the stock can use the stock at its value on the day of the departed and escape capital gains tax c. Information or Signaling content, hypothesis: Is an indication by the firm through a price change in the dividend that may provide information as to what the anticipated earnings may be for the firm, which proceeds the actual dividend announcement Clientele Effect: The effect information about dividend announcements have on stockholders that receive dividends d. Residual Distribution Model: Model to determine the target distribution ratio, using four steps Extra Dividend: Supplemental dividend that are paid in addition to the regular dividend when times are good. This dividend may not always be paid or maintained in the future e. Declaration date: The date the directors met to declare the regular dividend Holder-of-Record date: The date as of the close of business where all owners of record for a firms stock would receive dividends based upon the number of shares owned Ex-Dividend date: The date when the right to the dividend leaves the stock Payment date: When the company actually mails the check to the holders of record f. Dividend reinvestment plan (DRIP): An automated way in which stockholders can automatically purchase shares of common stock instead of having dividends paid out in cash. g. Stock Split: When shares of a company stock are divided, thereby increasing the number of share outstanding in the marketplace, a technique to keep a stock in an optimal price trading range Stock Dividend: Increases the number of shares outstanding as with a stock split, but stockholders on record would receive a proportionate share of stock at not cost as a stock dividend
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Stock repurchases: Is when a company buys back some of its own outstanding stock 18-2) How would each of the following changes tend to affect aggregate payout ratios, other things held constant? a.) An increase in the personal income tax:
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Group 5 A5 T5 10 - Chapter 18 Questions 18-1 Define each of...

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