A) One nice feature of dividend reinvestment plans (DRIPs) is that they reduce the taxes investors would have to pay if they received cash dividends.
B) Empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend, and as a result, share prices fall when dividend increases are announced. The reason for this is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities.
C) If a company wants to raise new equity capital steadily over time, a new stock dividend reinvestment plan would make sense. However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.
D) Dividend reinvestment plans have not caught on in most industries, and today about 99% of all companies with DRIPs are utilities.
F) A) and C)
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A) that investors require that the dividend yield and capital gains yield equal a constant
B) that capital gains are taxed at a higher rate than dividends
C) that investors view dividends as being less risky than potential future capital gains
D) that investors value a dollar of expected capital gains more highly than a dollar of expected dividends because of the lower tax rate on capital gains
F) None of the above
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A) Firm M probably has a lower debt ratio than Firm N.
B) Firm M probably has a higher dividend payout ratio than Firm N.
C) If the corporate tax rate increases, the debt ratio of both firms is likely to decline.
D) Firm N is likely to have a clientele of shareholders who want to receive consistent, stable dividend income.
F) A) and D)
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A) $32.06
B) $33.75
C) $35.44
D) $37.21
F) A) and D)
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A) declaration date, holder-of-record date, ex-dividend date, payment date
B) declaration date, ex-dividend date, holder-of-record date, payment date
C) declaration date, holder-of-record date, payment date, ex-dividend date
D) holder-of-record date, declaration date, ex-dividend date, payment date
F) All of the above
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A) One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.
B) If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should NOT follow the strict residual dividend policy.
C) If a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever the firm's investment opportunities improve.
D) Despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees.
F) None of the above
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B) False
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A) Choice W
B) Choice X
C) Choice Y
D) Choice Z
F) All of the above
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A) 37.2%
B) 39.1%
C) 41.2%
D) 43.3%
F) A) and C)
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B) False
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A) If a firm follows the residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm's dividend payout.
B) The clientele effect can explain why so many firms change their dividend policies so often.
C) One advantage of adopting the residual dividend policy is that this policy makes it easier for corporations to develop a specific and well-identified dividend clientele.
D) New-stock dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don't change the firm's total amount of book equity.
F) B) and C)
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B) False
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B) False
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B) False
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A) Its earnings become more stable.
B) Its access to the capital markets increases.
C) Its R&D efforts pay off, and it now has more high-return investment opportunities.
D) Its accounts receivable decrease due to a change in its credit policy.
F) All of the above
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B) False
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A) Stock repurchases can be used by a firm as part of a plan to change its capital structure.
B) After a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise.
C) Investors can interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued.
D) Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan.
F) A) and C)
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A) $23.21
B) $24.43
C) $25.71
D) $27.00
F) A) and C)
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A) Modigliani and Miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the bird-in-the hand effect.
B) One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.
C) The key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy.
D) The clientele effect suggests that companies should follow a stable dividend policy.
F) B) and D)
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A) When firms are deciding on the size of stock splits-say, whether to declare a 2-for-1 split or a 3-for-1 split-it is best to declare the smaller one, in this case, the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.
B) Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today, stock dividends are used far more often than stock splits.
C) When a company declares a stock split, the price of the stock typically declines-by about 50% after a 2-for-1 split-and this necessarily reduces the total market value of the equity.
D) If a firm's stock price is quite high relative to most stocks-say, $500 per share-then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50. Moreover, if the price is relatively low-say, $2 per share-then it can declare a "reverse split" of, say, 1-for-25 so as to bring the price up to somewhere around $50 per share.
F) A) and B)
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