PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 16, Problem 14PS
Payout policy in perfect capital markets Respond to the following comment: “It’s all very well saying that I can sell shares to cover cash needs, but that may mean selling at the bottom of the market. If the company pays a regular cash dividend, investors avoid that risk.”
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In examining investors’ preferences for dividends, it is useful to begin with the concept of dividend irrelevance. Dividend irrelevance suggests that in a world with no taxes or brokerage (or transaction) costs, firms and investors are indifferent to the paying or receiving of dividends.
However, as these restrictions are relaxed, various factors suggest that firms should pursue high or low payouts. One such factor is:
Dividends received far into the future are significantly more uncertain than dividends received in the near future.
Based on the factor described, identify whether investors, in general, will tend to favor high or low payout ratios.
Favor a high payout
Favor a low payout
Dividend changes may be used by management as a credible communication tool to signal investors about future earnings under which of the following dividend policy theories?
Select one:
a. the clientele effect
b. the expectations theory
c. the residual dividend theory
d. the information effect
Question 19
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Question text
In perfect capital markets there
Select one:
a. are no income taxes.
b. are no flotation costs.
c. All of these.
d. is no informational content assigned to a particular dividend policy.
The bird-in-hand theory would predict that the companies could decrease their cost of equity financing by raising their dividend payout. True or false?
Chapter 16 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 16 - Dividend payments In 2017, Entergy paid a regular...Ch. 16 - Dividend payments Seashore Salt Co. has surplus...Ch. 16 - Repurchases Look again at Problem 2. Assume...Ch. 16 - Repurchases An article on stock repurchase in the...Ch. 16 - Company dividend policy Here are several facts...Ch. 16 - Prob. 7PSCh. 16 - Information content of dividends What is meant by...Ch. 16 - Information content of dividends Does the good...Ch. 16 - Information content of dividends Generous dividend...Ch. 16 - Prob. 11PS
Ch. 16 - Payout policy in perfect capital markets Go back...Ch. 16 - Payout policy in perfect capital markets Go back...Ch. 16 - Payout policy in perfect capital markets Respond...Ch. 16 - Prob. 15PSCh. 16 - Repurchases and the DCF model Hors dAge...Ch. 16 - Repurchases and the DCF model Surf Turf Hotels is...Ch. 16 - Repurchases and the DCF model House of Haddock has...Ch. 16 - Repurchases and the DCF model Little Oil has 1...Ch. 16 - Repurchases and EPS Many companies use stock...Ch. 16 - Dividends and value We stated in Section 16-3 that...Ch. 16 - Payout and valuation Look back one last time at...Ch. 16 - Dividend clienteles Mr. Milquetoast admires Warren...Ch. 16 - Prob. 24PSCh. 16 - Payout and taxes Which of the following U.S....Ch. 16 - Prob. 26PSCh. 16 - Prob. 27PSCh. 16 - Prob. 28PSCh. 16 - Dividend policy and the dividend discount model...Ch. 16 - Prob. 30PS
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
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- Finance Political stability is a major factor of which one of the following? business risk inflation risk country risk exchange rate risk 2. Regarding short selling: which one of the following statements is incorrect? Dividends on any stock sold short must be covered by the short seller. There is no time limit on a short sale. Short sales are permitted only on falling prices or a downtick. Short sellers must put up margin as if they had gone long.arrow_forwardis NOT a characteristic of a money market instrument. A. illiquidity B. short maturity C. low risk D. none of above Which of the following is a characteristic of preferred stock? A. Give voting rights to its owner. B. It is like annuity. C. Investors cannot force the payment of the dividend. D. Dividends are tax-deductible for the fim as opposed to interest payment. Which of the following is NOT money market security? A. Bankers acceptance B. Treasury notes C. Federal funds D. Eurodollars and Eurodollar CD'sarrow_forwardA firm is planning to issue bonds to make an equity repurchase to increase its stock price. It is basing its analysis on the fact that there will be fewer shares outstanding after the repurchases, and higher earnings per share. Will the higher earnings per share always translate into a higher stock price? a. No b. Depends on stock price c. Yes d. Indifferentarrow_forward
- B. State whether each of the following statements is true or false, and briefly explain why. (i) In perfect capital markets, payout policy is irrelevant. (ii) There are certain types of investors who prefer share repurchases over cash dividends. (iii) Empirical evidence shows that despite higher tax rates on dividends than on capital gains, the number of firms paying cash dividends is higher than the number of firms conducting share repurchases. (iv) Investors generally prefer the imputation tax system over the classical tax system. (v) Firms are generally reluctant to cut cash dividends.arrow_forwardA bank that seeks to increase its risk-adjusted capital ratio has a number of options at its disposal including: Issue new equity, such as through a rights issue to existing shareholders, an equity offering on the open market, or by placing a bloc of shares with an outside investor. Increase retained earnings by reducing the share of its profit it pays out in dividends. Reduce its risk-weighted assets by replacing riskier loans with safer ones or with government securities. Chose 1 option from below:Only I is correct. Only II is correct. I and II are correct. Only III is correct. I, II and III are correct. Thanks!arrow_forwardWhen you invest your money, you want to avoid risk at all cost. Which type of investment would you MOST likely choose? O a) small-company stocks b) large-company stocks c) corporate bonds 0 d) Treasury billsarrow_forward
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