Exam 13: Dividend Policy and Internal Financing

According to the clientele effect

The dividend irrelevance hypothesis is based on all of the following assumptions EXCEPT

After a stock split of 2:1,each investor will have twice the number of shares,but the same percentage ownership in the firm that he had before the split.

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

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.

Expected dividends and share repurchases are the cash flow that underlies stock valuation.

Trevor Co.'s future earnings for the next four years are predicted below.Assuming there are 500,000 shares outstanding,what will the yearly dividend per share be if the dividend policy is Trevor & Co. 1 $ 900,000 2 1,200,000 3 850,000 4 1,350,000 a.a constant payout ratio of 40% b.stable dollar dividend targeted at 40% of the average earnings over the four-year period c.small,regular dividend of $0.75 plus a year-end extra of 40% of profits exceeding $1,000,000

We typically expect to find rapidly growing firms to have high payout ratios.

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

A firm's stock price may decline by less than 50% after a 2 for 1 stock split if the reduction in price moves the stock into its optimal trading range.

The viewpoint that high dividends increase stock values is based on which of the following principles?

If a company in a perfect capital market decreased its dividend per share,an investor would be forced to sell his common stock at a depressed price.

Dividends generally

You are a retired worker whose income is derived from your company pension plan and social security.However,you are highly dependent upon the income generated from your 401(k)plan,which is heavily weighted in stocks that pay substantial dividends.Which of the following dividend policies would you prefer?

Bass Frozen Foods,Inc.has found three acceptable investment opportunities.The three projects require a total of $5 million in financing.It is the company's policy to finance its investments by using 40% debt and 60% common equity.The firm has generated $3.8 million dollars from its operations that could be used to finance the common equity portion of its investments. a.What portion of the new investments will be financed by common equity and what portion by debt? b.According to the residual dividend theory,how much would be paid out in dividends?

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

The information effect hypothesis implies that increasing dividends provides a more credible signal of higher future earnings than does management's assertion that future earnings will be higher.

Assume that the tax on dividends and the tax on capital gains is the same.All else equal,what would a prudent investor prefer?

Federal tax law is irrelevant to corporate dividend policy because dividends are not tax deductible.

A firm's dividend payout ratio is