Exam 13: Dividend Policy and Internal Financing

According to the bird-in-the-hand dividend theory,investors value a dollar of expected capital gain more highly than a dollar of expected dividends because capital gains are more unpredictable than dividends.

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

A closely-held company whose owners are trying to maintain control would be less likely to pay dividends so that all earnings may be retained to finance future growth.

SEC regulations require that corporate stock repurchases must be done in the open market so that all shareholders have an equal opportunity to sell their shares.

An investor who requires a 12% percent return for a stock that pays no dividends and requires a 9% return for a stock that pays its entire return from dividends is most likely a proponent of

Under the ideal conditions of perfect capital markets,dividend policy has no effect upon share price.

Share repurchases are not part of the stock valuation process because by definition the cash flow from a share repurchase ends the investment as the stock is no longer owned by the shareholder.

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

A corporation decides to cut its dividend from $2 per share to $1.50 per share.Give two rationales/theories to explain why this action may cause the stock price to decrease and two rationales/theories to explain why this action may cause the stock price to increase.

The payment of dividends may indirectly result in closer monitoring of management's investment activities,thus increasing shareholder value by

The information effect suggests dividend policy matters because dividends act as a persuasive communications tool,signaling investors about the financial condition of the firm.

The Clydesdale Corporation has an optimal capital structure consisting of 70 percent debt and 30 percent equity.The marginal cost of capital is calculated to be 14.75 percent.Total earnings available to common stockholders for the coming year total $1,200,000.Investment opportunities are: a.According to the residual dividend theory,what should the firm's total dividend payment be? b.If the firm paid a total dividend of $675,000,and restricted equity financing to internally generated funds,which projects should be selected? Assume the marginal cost of capital is constant.

All of the following may influence a firm's dividend payment EXCEPT

According to the "bird-in-the-hand" dividend theory,the required return for a stock that pays its entire return from dividends is higher than the required return for a high-growth stock that pays no dividend.

What is the information effect associated with dividends? Why does it occur?

The "bird-in-the-hand" dividend theory suggests that

Memory,Inc.expects earnings per share this year to be $8.If earnings per share grow at an average annual rate of 6 percent and if Baker pays 60 percent of its earnings as dividends,what will the expected dividend per share be in 7 years?

Investor A owns 10% of the common stock of IDE Corporation.After IDE completes a 2-for-1 stock split,Investor A will own 20% of the common stock of the corporation.

When an unexpected change in dividend policy develops,investors may attach informational content to the events.

A firm's dividend policy provides information pertaining to the firm's payout ratio and its stability.