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Unformatted text preview: ent income in the form of dividends.
6. The firm could pay a stock dividend in place of the cash dividend, and some stockholders might be
satisfied with that. However, the majority would probably recognize that they had not received
anything at all. A stock dividend is merely a paper entry creating more shares. It would only be
perceived as beneficial if total stockholders’ cash dividends increased as a result. (This, of course,
would defeat the proposed purpose of the stock dividend—to conserve funds.)
7. As we mentioned in question 5, there is no universal agreement on this question. Some would argue
that dividends do not matter and some would argue that they do. Most would agree, however, that
if the firm does pay taxes, and if there are flotation costs associated with outside equity financing, and
if there are costs associated with bankruptcy, then capital structure does matter, and dividend policy
matters. Intuitively, and in the face of the obvious custom in the retailing industry, we would view a
decision by a mature firm such as Montgomery to go to a residual dividend policy with some
misgivings. Such a policy is perhaps best left to a younger firm....
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This note was uploaded on 12/21/2012 for the course FINC 309 taught by Professor Bunker during the Spring '12 term at Westminster UT.
- Spring '12
- Corporate Finance