PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 16, Problem 26PS
Summary Introduction
To determine: The impact of tax change on the total cash dividend paid and proportion of high-versus low-payout firms.
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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
In perfect capital markets there
Select one:
a. are no income taxes.
b. are no flotation costs.
c. All of these.
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.
Question
Investors who wish to avoid paying taxes in the present are typically . A. low-dividend clientele
B. high-dividend clientele
C. drawn to firms that have erratic dividend policies
D. none of the above
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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- One position expressed in the financial literature is that firms set their dividends as a residual after using income to support new investments. Explain what a residual policy implies (assuming that all distributions are in the form of dividends), illustrating your answer with a table showing how different investment opportunities could lead to different dividend payout ratios.arrow_forwardInvestors who wish to avoid paying taxes in the present are typically . A. low-dividend clientele B. high-dividend clientele C. drawn to firms that have erratic dividend policies D. none of the abovearrow_forwardIf the present value of a firm’s marginal financial distress costs are less than the present value of its marginal tax shield, the company Select one: a. has too much debt in its capital structure b. should increase the amount of debt in its capital structure c. has an optimal capital structure d. should increase the amount of equity in its capital structure e. none of the abovearrow_forward
- If the present value of a firm's marginal financial distress costs are equal to the present value of its marginal tax shieid, the companySelect one:a.has too much debt in its capital structureb.should increase the amount of debt in ts capital structurec. has an optimal capital structured.shouid reduce the amount of equity in its capital structuree:none of the abovtarrow_forwardWhat is the relationship between the expected return of a stock and its fair expected return? When is a stock underpriced, overpriced, or fairly priced? Explain what happens to the firm’s cost of equity, cost of debt, and cost of capital when the firm increases the amount of debt in its capital structure. Assume all Modigliani and Miller assumptions hold and that there are no taxes. How can we use the internal rate of return to evaluate whether we should pursue a specific project? Should we pursue a project when the cost of capital is higher than the internal rate of return?arrow_forwardWhich of the following statements is correct? a. Companies may pay too high a price in a large open market repurchase if it takes too long to complete. b. If a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase. c. An investor's capital gains from selling stock in a repurchase are always taxed at a higher rate than if the distribution were dividends. d. The tax code encourages companies to pay dividends rather than reinvest earnings. e. The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.arrow_forward
- The clientele argument in dividend theory implies that: The stock of low-payout firms will be held by investors seeking capital gains. O The dividend payout should be set equal to the industry average. Investors are indifferent between dividends and capital gains. O Firms should pay out dividends only after accepting all capital budgeting projects with positive NPVs.arrow_forwardTrue or False: The following statement accurately describes how firms make decisions related to issuing new common stock. Taking flotation costs into account will reduce the cost of new common stock. True: Taking flotation costs into account will reduce the cost of new common stock, because you will multiply the cost of new common stock by 1 minus the flotation cost—similar to how the after-tax cost of debt is calculated. False: Flotation costs are additional costs associated with raising new common stock. Sunny Day Manufacturing Company is considering investing in a one-year project that requires an initial investment of $475,000. To do so, it will have to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $550,000. The rate of return that Sunny Day expects to earn on its project (net of its flotation costs) is (rounded to two decimal places). White Lion…arrow_forwardFinance 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_forward
- It has been shown that in the absence of taxes and other market imperfections, the firm value will be unaffected by dividend policy. Explain the logic behind this conclusion. Next, describe three real-world factors that may cause one dividend policy to be preferable to another.arrow_forwardWith a decline in the number of publicly traded companies and the growth of other investment vehicles such as private equities, hedge funds, junk bonds, etc., some people claim that the investment world is becoming more and more unfair towards smaller investors since most of the alternative investment vehicles are only available to institutions or high-net-worth individuals. Do you agree or disagree with this claim?arrow_forwardWhich one of the followings is incorrect regarding to cost of equity: On average, it is higher than cost of debt. It moves in the same direction with tax rates. It is affected by return on market portfolio. For a dividend paying company, it is sensitive to growth expectations for future dividends. It is highly dependent on risk level of the firm and growth rate. For calculating cost of equity, we can rely on dividend growth model or SML approach. Both models might suffer from the assumption that past is a good predictor of future. True False Percy's Wholesale Supply has earnings before interest and taxes of €106,000. Both the book and the market value of debt is €170,000. The unlevered cost of equity is 15.5 per cent while the pre-tax cost of debt is 8.6 per cent. The tax rate is 28 per cent. What is the firm's weighted average cost of capital? Show your steps.arrow_forward
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