Exam 14: Payout Policy

Gordon's "bird-in-the-hand" argument suggests that

A ________ has an effect on the firm's share price similar to that of a ________.

Dividends provide information about the firm's current performance but no information about the firm's future performance.

The payment date is five days after the date of record, on which the company will mail the dividend to the holders of record.

Dividends are the only means by which firms can distribute cash to shareholders.

Generally as long as earnings remain constant, the repurchase of shares reduces the number of outstanding shares, raising the earnings per share and therefore the market price per share.

The residual theory of dividends suggests that dividends are ________ to the value of the firm.

The primary purpose of a stock split is to

The shareholder receiving a stock dividend receives

According to the residual theory of dividends, if the firm's equity need exceeds the amount of retained earnings, the firm would

Reverse stock splits are initiated when a stock is selling at too low a price to appear respectable.

A shareholder receiving a stock dividend typically receives nothing of value.

Purchasers of a stock selling ex-dividend receive the current dividend.

The dividend payment date is set by the firm's board of directors and represents the actual date on which the firm mails the dividend payment to the holders of record.

A firm has current after-tax earnings of $1,000,000 and has declared a cash dividend of $400,000. The firm's dividend payout ratio is

In general, the market rewards firms that adopt a constant dividend payout policy rather than a fixed or increasing level of dividends through higher share prices.

According to Modigliani and Miller, a firm's value is determined solely by the earning power and risk of its assets and that the manner in which it splits its earnings stream between dividends and internally retained funds does not affect this value.

Since lenders are generally reluctant to make loans to a firm to pay dividends, the firm's ability to pay cash dividends is generally constrained by the amount of excess cash available.

Generally, legal constraints prohibit the payment of cash dividends until a certain level of earnings has been achieved or limit the amount of dividends paid to a certain dollar amount or percentage of earnings.

If a firm pays out a higher percentage of earnings, new equity capital will have to be raised with common stock, which will result in higher control and earnings for the existing owners.