PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 16, Problem 6PS
Company dividend policy Here are several “facts” about typical corporate dividend policies. Which are true and which false?
- a. Companies decide each year’s dividend by looking at their capital expenditure requirements and then distributing whatever cash is left over.
- b. Managers and investors seem more concerned with dividend changes than with dividend levels.
- c. Managers often increase dividends temporarily when earnings are unexpectedly high for a year or two.
- d. Companies undertaking substantial share repurchases usually finance them with an offsetting reduction in cash dividends.
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A company’s dividend policy refers to the manner in which a firm distributes its earnings to shareholders. Firms can pay out cash in one of two ways: a dividend or a share repurchase. Before 1983, stock repurchases were fairly rare, but today they are common. When a firm decides to pay a dividend, it usually follows the following process.
Several critical dates play a role in the dividend payment procedure. In the following table, identify the critical dividend dates. Check boxes that apply for each:
Declaration Date
Ex-Dividend Date
Payment Date
Holder-of-Record Date
Dividend checks are sent to shareholders.
Shares purchased on or after this date do not entitle investors to the stock’s dividend.
All shareholders as of this date will be mailed a dividend check.
The firm announces its intention to pay a dividend.
Which of the following statements is true?
a. High liquidity means a company is short on cash and may be unable to pay its debts.b. When a company decides to go public through an IPO, it is typically targeting to sell its shares to only a handful of shareholders. c. If the company has a higher than expected extremely high profit this year, equity holders will benefit more than debt holders as debtholders are the residual claimers for the cash flows of the company.d. In the extreme case, the debt holders take legal ownership of the firm's assets through a process called bankruptcy.e. Equity holders expect to receive dividends and the firm is always legally obligated to pay them.
Which of the following situation in which the quality of the company’s pay-out to shareholders may decline
a. Decrease in cash position
b. Increase in positive NPV investment opportunities
c. Increase in capital gains tax
d. Decrease in marginal tax rate on dividends
Which of the following concepts tells us that dividends are to be paid only when the capital budget has been already supplied?
a. Gordon Growth model
b. Dividend irrelevance theory
c. Retain Earnings break-point principle
d. Residual Dividend Model
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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- Except for one of the following the constant dividend growth model is useful to corporate managers because: a. the required rate of return of shareholders is related to the company's level of risk as perceived by investors. b. the dividend stream is influenced by earnings and profitability as well as the dividend policy of management c. the growth rate is related to the efficiency of the company in generating returns on equity d. inflation calculations are incorporated in the modelarrow_forwardThe use of homemade dividends allows stockholders to change the: A. cash payout received by selling off shares to receive current income. B. return pattern of the firm by leveraging their position like the firm. C. value of the company by increasing shareholders' cash payout D. Both A and C. E. Both B and C.arrow_forwardWhich one of the following statements is correct? A) Modigliani and Miller argued that dividend decisions are more important than capital structure decisions. Dividend policy is usually set by shareholders during the Annual General Meeting of a company. C) A share repurchase is an alternative to a dividend as a means for redistributing cash to the equity market. Shareholders typically view dividend increases as a signal of financial distress.arrow_forward
- 4. Dividend practices In general, firms dividend practices fit into the categories listed in the following table (constant payout ratio, low regular dividend plus extras, residual dividend policy, and stable, predictable dividend policies). Identify the category that each practice corresponds to in the table. Practice Globo-Chem Co. sets its dividend rather conservatively, but supplemental dividends are periodically issued when it finds itself with excess funds. St. Mildred's Brewing Co.'s dividends represent the portion of earnings left after it has made all profitable investments. Spentworth Industries Inc.'s investors like the firm's dividend policy because the firm pays the same dividend every year no matter how the firm performs. Extensive Enterprises Inc. pays out a set percentage of its income each year in the form of dividends. This causes the firm's dividends to fluctuate from year to year. Constant Payout Ratio Low Regular Dividend Plus Extras Residual Dividend Stable,…arrow_forwardIn case you retain huge amount of profit of your company for long term investment, what financial decision do you take – to pay high cash dividend? Or to issue bonus share (stock dividend)? And explain why?arrow_forwardDividend policy determines the ratio between the earnings distributed to shareholders and the earnings retained in the company. Should the cash be reinvested in business operations or should it be paid out to investors in equity? The decision might seem simple, but it provokes a surprising number of controversies. a) In relation to the above, discuss the different dividend policy theories. b) Explain the Gordon's Dividend Valuation Model.arrow_forward
- A company’s dividend policy can also be affected by factors internal to the organization and by the external (macroeconomic) environment in which the business operates. In the table that follows, identify which factors, in general, tend to favor high or low dividend payout ratios. Factor Favors a High Payout Favors a Low Payout A company has a large retained earnings balance on its balance sheet but has very little cash and almost no other liquid assets. A company has an established credit line that it can access when it needs an external source of funding. A closely held firm has a majority of its shareholders in high marginal tax brackets. Each factor higher or lower payout Having the ability to accelerate or delay projects makes it easier or harder for a firm to adhere to a stable dividend policy. If management is concerned with keeping control of the company, it will be likely to retain more or less earnings than…arrow_forward5. An optimal dividend policy is one that takes into consideration that:a) Dividends should only be distributed based on the profits of the last period.b) Dividends can be distributed even if the company recorded losses in the last period.c) The balance between current dividends and future growth is achieved, maximizing the value of the company.d) It manages to attract investors who have a predilection for relatively high risks.arrow_forwardDeciding how much earnings to retain and how much to return to ordinary shareholders is a key partof dividend policy. Drawing on the dividend policy literature critically discuss some of the factors thatneed to be considered by senior managers of a listed company when deciding on:a) the size of the annual dividend to return to its shareholders and the practical issues that needto be considered when deciding on the size of the dividend payment.Squeezeco is currently deciding on the level and form of its next dividend. It is consideringthree options:i. A cash dividend payment of 15p per shareii. A 5% scrip dividendiii. A repurchase of 15 % of ordinary share capital at the current market priceExtracts form the company’s financial statements are given below £m £mOperating profit 24.5Taxation 7.8 Distributable earnings…arrow_forward
- Which of the following statements about payout policy is FALSE? a. Share repurchases concentrate ownership in the hands of the remaining shareholders, making their shares worth more than they were before the repurchase. b. Firms should generally pay out no more than their free cash flow to equity, unless they are in the process of paying out a large cash balance. c. Dividends typically increase at a slower rate than earnings. d. Firms today return more cash to shareholders through repurchases than through dividends. e. Dividends are lower for firms that have higher growth rates.arrow_forwardShould stockholder wealth maximization be thought of as a long-term or a short-term goal? For example, if one action increases a firm’s stock price from a current level of $20 to $25 in 6 months and then to $30 in 5 years but another action keeps the stock at $20 for several years but then increases it to $40 in 5 years, which action would be better? Think of some specific corporate actions that have these general tendencies.arrow_forwardStockholder Payout Rations Super Duper Corporation had a string of successful years. Super Dupers executives wish to examine how its stockholders have been compensated for their contributed capital. The following information pertains to Super Duper Corporation: Required: Calculate the dividend yield, dividend payout, and total payout.arrow_forward
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