CHAPTER_16_corrected - CHAPTER 16 Payout Policy Corrections...

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1 CHAPTER 16 Payout Policy Corrections and clarifications are in bold. Answers to Problem Sets 1. a. A1, B5; A2, B4; A3, B3; A4, B1; A5, B2 b. On August 12, the ex-dividend date c. (.35 X 4)/52 = .027, or 2.7% d. (.35 X 4)/4.56 =.31, or 31% e. The price would fall to 52/1.10 = $47.27 2. a. False. The dividend depends on past dividends and current and forecasted earnings. b. True. Dividend changes convey information to investors. c. False. Dividends are “smoothed.” Managers rarely increase regular dividends temporarily. They may pay a special dividend, however. d. False. Dividends are rarely cut when repurchases are being made. 3. a. Reinvest 1,000 X $.50 = $500 in the stock. If the ex-dividend price is $150 - $2.50, this should involve the purchase of 500/147.50, or about 3.shares. b. Sell shares worth 1,000 X $3 = $3,000. If the ex-dividend price is $200 – $5, this should involve the sale of 3,000/195, or about 15 shares. 7. Current tax law (assuming gains tax cannot be deferred): All investors should be indifferent except the corporation which prefers Hi. Zero tax on capital gains: As under the current tax law except that individuals now prefer Lo. (Note: corporations and security dealers treat capital gains as income).
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2 18. a. Because this is a regular dividend, the announcement is not news to the stock market. Hence, the stock price will adjust only when
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This note was uploaded on 05/09/2011 for the course FNAN 522 taught by Professor Wilson during the Spring '11 term at University of Louisiana at Lafayette.

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CHAPTER_16_corrected - CHAPTER 16 Payout Policy Corrections...

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