Exam 13: Payout Policy

Date of record (dividends) is the actual date on which the company will mail the dividend payment to the holders of record.

In most states, legal capital is measured not only by the par value and paid in capital of the stock, but also by any accumulated retained earnings.

In establishing a dividend policy, a firm should retain funds for investment in projects yielding higher returns than the owners could obtain from external investments of equal risk.

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.

A firm has had the following earnings history over the last five years: If the firm's dividend policy is based on a $0.50 payout per share, increasing by $0.05 per share whenever earnings exceed $1.50 per share, the annual dividends for 2000 and 2003 were

A firm has had the following earnings history over the last five years: If the firm's dividend policy was based on a constant payout ratio of 50 percent for all of the years with earnings over $1.50 per share and a zero payout otherwise, the annual dividends for 1999 and 2003 were

Dividend reinvestment plans (DRIPs) enable stockholders to use dividends received on the firm's stock to acquire additional shares or fractional shares at little or no transaction (brokerage) cost.

Shareholder wealth considerations in the payment of dividends include all of the following EXCEPT

Dividends provide information about the firm's current and future performance.

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

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.

A firm has had the indicated earnings per share over the last three years: (a) If the firm's dividend policy was based on a constant payout ratio of 50 percent, determine the annual dividend for each year. (b) If the firm's dividend policy was based on a fixed dollar payout policy of 50 cents per share plus an extra dividend equal to 75 percent of earnings per share above $1.00, determine the annual dividend for each year.

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.

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

In most states, legal capital is measured either by the par value of common stock; other states, however, define legal capital to include not only the par value of the stock, but also any paid in capital in excess of par.

Regular dividend policy is a dividend policy based on the payment of a certain percentage of earnings to owners in each dividend period.

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

A firm has the following stockholders' equity balances: In states where the firm's legal capital is defined as the par value of its common stock, the maximum cash dividend the firm could pay is

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.