CHAPTER 14 DIVIDENDS AND DIVIDEND POLICY Answers to Concepts Review and Critical Thinking Questions1. Dividend policy deals with the timing of dividend payments, not the amounts ultimately paid. Dividendpolicy is irrelevant when the timing of dividend payments doesn’t affect the present value of all futuredividends. 2. A stock repurchase reduces equity while leaving debt unchanged. The debt ratio rises. A firm could, if desired, use excess cash to reduce debt instead. This is a capital structure decision. 3. The chief drawback to a strict dividend policy is the variability in dividend payments. This is a problembecause investors tend to want a somewhat predictable cash flow. Also, if there is information contentto dividend announcements, then the firm may be inadvertently telling the market that it is expecting adownturn in earnings prospects when it cuts a dividend, when in reality its prospects are very good. In acompromise policy, the firm maintains a relatively constant dividend. It increases dividends only whenit expects
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