Exam 14: Payout Policy

The bird-in-the-hand argument espousing the importance of dividends or dividend relevance suggests that investors view a current (certain) dividend as less risky than future (uncertain) dividends or capital gains; this suggests that whether a firm pays a dividend or not can have a significant impact on share price.

Ignoring general market fluctuations, the stock's price would be expected to drop by the amount of the declared dividend on the ex-dividend date.

The clientele effect is the argument that a firm attracts shareholders whose preferences with respect to the payment and stability of dividends corresponds to the payment pattern and stability of the firm itself.

Among owner considerations in the establishment of dividend policy, any of the following may enter into the decision EXCEPT

If the firm's earnings remain constant and total cash dividends do not increase, a stock dividend results in a lower per-share market value for the firm's stock.

The residual theory of dividends, as espoused by Modigliani and Miller, suggests that dividends represent an earnings residual rather than an active decision variable that affects firm value; this means that a firm's decision to pay dividends or not will not have any impact on a firm's share price.

The residual theory of dividends tends to suggest that the required return of investors is not influenced by the firm's dividend policy and, thus, dividend policy is irrelevant.

The level of dividends a firm expects to pay is generally unrelated to how rapidly it expects to grow as well as the level of asset investments required.

The Jobs Growth Tax Relief Reconciliation Act of 2003 significantly changed the tax treatment of corporate dividends for most taxpayers by dropping the tax rate to the rate applicable on capital gains, which is a maximum rate of 25%.

The residual theory of dividends implies that if the firm can not earn a return (IRR) from investment of its earnings that is in excess of cost (WMCC), it should distribute the earnings by paying dividends to stockholders.

By purchasing shares through a firm's dividend reinvestment plan (or DRIP), shareholders typically can acquire shares at a value that is below the prevailing market price.

If a firm has overdue liabilities or is legally insolvent or bankrupt, most states prohibit its payment of cash dividends.

The problem with a constant-payout-ratio dividend policy from the shareholder's perspective is that

The factors involved in setting a dividend policy include all of the following EXCEPT

A firm has had the following earnings history over the last five years: If the firm's dividend policy was to pay $0.25 per share each period except when earnings exceed $1.50, when an extra dividend equal to 50 percent of the earnings above $1.50 would be paid, the annual dividends for 2000 and 2003 were

The level of dividends a firm expects to pay is often directly related to how rapidly it expects to grow as well as the level of asset investments required.

In general, with regard to dividend payments, the contractual constraints imposed by loan agreements can include all of the following EXCEPT

The bird-in-the-hand argument espousing the importance of dividends or dividend relevance suggests that investors view a current (certain) dividend as less risky than future (uncertain) dividends or capital gains; nevertheless, proponents of this theory argue that this will have no significant impact on share price.

A firm that has a large percentage of ________ investors may pay out a lower percentage of its earnings as dividends.

The representative theory of dividends, as espoused by Modigliani and Miller, suggests that dividends represent a significant, active decision variable that affects firm value; this means that a firm's decision to pay dividends can have a significant impact on a firm's share price.