Exam 13: Dividend Policy and Internal Financing

A corporation announces a significant increase in its annual dividend and its stock price increases on the news.This could be explained most directly by

According to the residual theory of dividends,

Kelly owns 10,000 shares in McCormick Spices,which currently has 500,000 shares outstanding.The stock sells for $86 on the open market.McCormick's management has decided on a two-for-one split. a.Will Kelly's financial position change after the split,assuming that the stock's price will fall proportionately? b.Assuming only a 35% decrease in the stock price,what will be Kelly's value after the split?

Which of the following statements would be consistent with the dividend irrelevance theory?

There is no difference on an economic basis between a stock dividend and a stock split.

According to the clientele effect,dividend policy matters even if capital markets are perfect because investors self-select into dividend preference groups.

Distinguish between the residual dividend theory and the clientele effect.

A corporation has been paying out $1 million per year in dividends for the past several years.This year,the company wants to pay the $1 million dividend,but can't.All of the following are reasons the company cannot continue its dividend payment policy EXCEPT

AFB,Inc.declared a dividend of $2 per share,which was an increase of 25% from the prior year,yet AFB,Inc.stock declined by 3% the day of the announcement.DAS,Inc.declared a dividend of $2 per share,which was the same as the prior year,and its stock increased in value by 2% on the day of the announcement.These events could be most readily explained by the

Coppell Timber Company had total earnings last year of $5,000,000,but expects total earnings to drop to $4,750,000 this year because of a slump in the housing industry.There are currently 1,000,000 shares of common stock outstanding.The company has $4,000,000 worth of investments to undertake this year.The company finances 40 percent of its investments with debt and 60 percent with equity capital.The company paid $3.00 per share in dividends last year. a.If the company follows a pure residual dividend policy,how large a dividend will each shareholder receive this year? b.If the company maintains a constant dividend payout ratio each year,how large a dividend will each shareholder receive this year? c.If the company follows a constant dollar dividend policy,how large a dividend will each shareholder receive this year?

Security markets are considered to be perfect when firms can issue securities at no cost and the investor incurs no brokerage commissions.

A justification for no dividend payments that would be pleasing to shareholders could be

All of the following factors support the proposition that dividend policy matters EXCEPT

Flotation costs

Describe the types of dividend policies that corporations frequently use.Which is most common? Why?

The viewpoint that low dividends increase stock value is based on which of the following principles?

LaMike owns 1,000 shares of DAS,Inc.'s common stock.The stock has a par value of $1 per share and is currently selling for $80 per share.DAS declares a 20% stock dividend.In a perfect capital market,after the dividend Sam will have

Because of the overriding importance of cash flows to valuation,one basic tenet of finance is that dividends increase the value of a company's common stock.

Dividends generally

Other things equal,individuals in high-income tax brackets should have a preference for firms that retain their earnings rather than pay dividends.