CFM4 Solns Chap 18


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CORPORATE FINANCIAL MANAGEMENT, Fourth Edition Solutions Manual , Chapter 18 Chapter 18 Questions 1. a. April 24 is the ex-dividend date. b.April 27 is the record date. c. May 5 is the payment date d.April 10 is the declaration date. 2. Dividend policy is irrelevant in a perfect capital market because no wealth is transferred through the payment of a dividend. When a dividend is paid, the stockholder receives cash, but the value of the equity decreases by the amount of the dividend. 3. The signal of paying a dividend can cause dividend policy to affect a firm’s value because it mitigates the information asymmetry between owners and management. The payment (or non-payment) or increase (or decrease) of a dividend sends a signal to the owners about the financial health of the firm. 4. A dividend clientele is a group of investors with the same preference for dividends because of their similar tax status. The existence of dividend clienteles can eliminate the tax differential view of dividend policy because each clientele will purchase securities with the type of preferred dividend policy. As long as there is a sufficient supply of all types of securities, investors will not pay a premium for a security with a specific type of dividend policy. 5. Transaction costs may affect a firm’s choice of dividend policy because it is cheaper for the firm to pay dividends than for investors to make homemade dividends. Also, firms tend to favor retained earnings for financing assets because of the high transaction costs associated with raising capital in the financial markets. 6. The first step in setting a dividend policy is to estimate future residual funds. Second, a target payout ratio should be established by analyzing the target ratios of other firms and determining what payout ratio is feasible for the firm to pay. Finally, the quarterly dividend should be set at a sustainable level so as to avoid negative signals associated with cutting the dividend. 7. Stock dividends and stock splits are very similar. The only difference between them is the way they are accounted for. A stock dividend causes a reduction in retained earnings and an increase in paid-capital and capital contributed in excess of par value. A stock split causes an increase in the number of shares and a decrease in the par value per share. Typically, a stock dividend will be used for a small proportional increase in shares while a stock split will be used for a large proportional increase in shares. 8. Share repurchase programs and dividend payments can be viewed as substitutes for each other because both are methods of distributing cash to the shareholders, and neither have an effect shareholder wealth in a perfect capital market environment. A share repurchase program will distribute cash to the shareholders that choose to sell their holdings. A dividend payment will distribute cash to all shareholders. A share repurchase program and a dividend payment can be perfect substitutes for each other in a perfect capital market. 9.
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This note was uploaded on 09/18/2011 for the course FIN 303 taught by Professor Bernile during the Spring '11 term at University of Miami.

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