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Unformatted text preview: Chapter 18 Discussion Questions 18-1. How does the marginal principle of retained earnings relate to the returns that a stockholder may make in other investments? The marginal principle of retained earnings suggests that the corporation must do an analysis of whether the corporation or the stockholders can earn the most on funds associated with retained earnings. Thus, we must consider what the stockholders can earn on other investments. 18-2. Discuss the difference between a passive and an active dividend policy. A passive dividend policy suggests that dividends should be paid out if the corporation cannot make better use of the funds. We are looking more at alternate investment opportunities than at preferences for dividends. If dividends are considered as an active decision variable, stockholder preference for cash dividends is considered very early in the decision process. 18-3. How does the stockholder, in general, feel about the relevance of dividends? The stockholder would appear to consider dividends as relevant. Dividends do resolve uncertainty in the minds of investors and provide information content. Some stockholders may say that the dividends are relevant, but in a different sense. Perhaps they prefer to receive little or no dividends because of the immediate income tax. 18-4. Explain the relationship between a companys growth possibilities and its dividend policy. The greater a companys growth possibilities, the more funds that can be justified for profitable internal reinvestment. This is very well illustrated in Table 18-1 in which we show four-year growth rates for selected U.S. corporations and their associated dividend payout percentages. This is also discussed in the life cycle of the firm. 18-5. Since initial contributed capital theoretically belongs to the stockholders, why are there legal restrictions on paying out the funds to the stockholders? Creditors have extended credit on the assumption that a given capital base would remain intact throughout the life of a loan. While they may not object to the payment of dividends from past and current earnings, they must have the protection of keeping contributed capital in place. S18-1 18-6. Discuss how desire for control may influence a firms willingness to pay dividends. Managements desire for control could imply that a closely held firm should avoid dividends to minimize the need for outside financing. For a larger firm, management may have to pay dividends in order to maintain their current position through keeping stockholders happy. 18-7. If you buy stock on the ex-dividend date, will you receive the upcoming quarterly dividend? No, the old stockholder receives the upcoming quarterly dividend. Of course, if you continue to hold the stock, you will receive the next dividend....
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- Spring '10