Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 19, Problem 3CQ
Dividend Policy It is sometimes suggested that firms should follow a “residual” dividend policy. With such a policy, the main idea is that a firm should focus on meeting its investment needs and maintaining its desired debt-equity ratio. Having done so, a firm pays out any leftover, or residual, income as dividends. What do you think would be the chief drawback to a residual dividend policy?
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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. Explainwhat a residual policy implies (assuming that all distributions are in the formof dividends), illustrating your answer with a table showing how differentinvestment opportunities could lead to different dividend payout ratios.
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Chapter 19 Solutions
Corporate Finance
Ch. 19 - Dividend Policy Irrelevance How is it possible...Ch. 19 - Stock Repurchases What is the impact of a stock...Ch. 19 - Dividend Policy It is sometimes suggested that...Ch. 19 - Dividend Chronology On Tuesday, December 8,...Ch. 19 - Prob. 5CQCh. 19 - Prob. 6CQCh. 19 - Dividends and Stock Price Last month, Central...Ch. 19 - Prob. 8CQCh. 19 - Dividend Policy For initial public offerings of...Ch. 19 - Investment and Dividends The Phew Charitable Trust...
Ch. 19 - Use the following information to answer the next...Ch. 19 - Stock Repurchases How do you think this tax law...Ch. 19 - Dividends and Stock Value The growing perpetuity...Ch. 19 - Bird-in-the-Hand Argument The bird-in-the-hand...Ch. 19 - Dividends and Income Preference The desire for...Ch. 19 - Dividends and Clientele Cap Henderson owns Neotech...Ch. 19 - Prob. 17CQCh. 19 - Prob. 18CQCh. 19 - Prob. 19CQCh. 19 - Prob. 20CQCh. 19 - Prob. 1MCCh. 19 - Jessica believes that the company should use the...Ch. 19 - Prob. 3MCCh. 19 - Another option discussed by Tom, Jessica, and...Ch. 19 - Prob. 5MCCh. 19 - Does the question of whether the company should...
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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
- How should (a) signaling and (b) the clienteleeffect be taken into account by a firm as it considers its dividend decision? Do signaling and clientele effects make it easier or harder to determineif investors prefer high or low payout ratios? Dothese factors influence the desirability of a stabledistribution policy versus one that is flexible andthus varies with the company’s cash flows andinvestment opportunities?arrow_forwardWhich one of the following statements about dividend policies is FALSE? a. One advantage of dividend reinvestment plans is that they allow shareholders to maintain a position in a company with minimal trading. b. One key disadvantage of a residual dividend policy is that it makes it hard for a company to follow a stable dividend policy. c. The clientele effect suggests that brokerage companies should choose customers whose dividend preferences match those of their client service borkers. d. The "bird-in-the-hand effect" is the argument that investors prefer dividends to capital gains because dividends are more certain than capital gains. e. In today's tax environment, gains through stock repurchases and dividend payments are taxed at the same ratearrow_forwardAccording to the capital structure trade-off model: O a. The optimal capital structure minimizes the company's weighted average cost of capital. O b. There is no optimal capital structure, but instead there is a hierarchy of sources of capital. O c. There is no optimal capital structure, and companies should aim to maximize debt financing, since they thereby minimize their tax payments. O d. The optimal capital structure minimizes the company's market value. O e. The optimal capital structure minimizes the company's cost of equity.arrow_forward
- A firm’s value depends on its expected free cash flow and its cost of capital. Distributions made in the form of dividends or stock repurchases impact the firm’s value and the investors in different ways. Some analysts have argued that a firm’s value should solely be determined by its basic earning power and the business risk of the firm. Which of these concepts would support these analysts’ argument? The signaling hypothesis The residual dividend model The clientele effect Dividend irrelevance theoryarrow_forwardIndicate whether the following statements are true or false. If the statementis false, explain why.f. If a firm follows a residual dividend policy then, holding all else constant, its dividend payout will tend to rise whenever the firm’s investment opportunities improve.arrow_forwardOutline the main features of the Stable Dividend Growth policy and explain the type of company this policy is likely to be unsuitable for.arrow_forward
- Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you’ve done in previous problems, but it focuses on a firm’s free cash flows (FCFs) instead of its dividends. Some firms don’t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Tropetech Inc. has an expected net operating profit after taxes, EBIT(1 – T), of $2,400 million in the coming year. In addition, the firm is expected to have net capital expenditures of $360 million, and net operating working capital (NOWC) is expected to increase by $45 million. How much free cash flow (FCF) is Tropetech Inc. expected to generate over the next year? $1,995 million $2,715 million $43,481 million $2,085 million…arrow_forwardQUESTION Generally speaking, the cost of debt is cheaper than the cost of equity. Does it imply that a firm should increase its debt-to-equity ratio to as high as possible such that its corporate cost of capital can be minimized?arrow_forwardWould a firm that has many good investment opportunities be likely to have ahigher or a lower dividend payout ratio than a firm with few good investment opportunities?Explain.arrow_forward
- 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.arrow_forwardWhich of the following is a valid reason for a firm not to use as much debt as it can raise? Group of answer choices The use of more debt is expected to result in an increase in the firmʹs cost of capital when everything is considered More debt will increase the firmʹs riskiness All of them are valid reasons for a firm to use less debt than might be available The use of more debt is expected to result in a lower price/earnings ratioarrow_forwardM-M theroy with perfect market suggests that divident payment: A.It dependes on the company's capital structure and retained earnings B.Has a positive impact on the value of a firm C.Has a negative impact on the value of a firm D.Has no impact on the value of a firmarrow_forward
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