Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 16, Problem 28PS
Summary Introduction
To determine: The impact of tax change on the total cash dividend paid and proportion of high-versus low-payout firms.
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In examining investors’ preferences for dividends, it is useful to begin with the concept of dividend irrelevance. Dividend irrelevance suggests that in a world with no taxes or brokerage (or transaction) costs, firms and investors are indifferent to the paying or receiving of dividends.
However, as these restrictions are relaxed, various factors suggest that firms should pursue high or low payouts. One such factor is:
Dividends received far into the future are significantly more uncertain than dividends received in the near future.
Based on the factor described, identify whether investors, in general, will tend to favor high or low payout ratios.
Favor a high payout
Favor a low payout
Dividend changes may be used by management as a credible communication tool to signal investors about future earnings under which of the following dividend policy theories?
Select one:
a. the clientele effect
b. the expectations theory
c. the residual dividend theory
d. the information effect
Question 19
In perfect capital markets there
Select one:
a. are no income taxes.
b. are no flotation costs.
c. All of these.
Question
Investors who wish to avoid paying taxes in the present are typically . A. low-dividend clientele
B. high-dividend clientele
C. drawn to firms that have erratic dividend policies
D. none of the above
Chapter 16 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 16 - Prob. 1PSCh. 16 - Company dividend policy Here are several facts...Ch. 16 - Dividend payments Seashore Salt Co. has surplus...Ch. 16 - Repurchases Look again at Problem 3. Assume...Ch. 16 - Payout policy in perfect capital markets Go back...Ch. 16 - Dividends and stock price Go back to the first...Ch. 16 - Prob. 7PSCh. 16 - Repurchases and the DCF model Surf Turf Hotels is...Ch. 16 - Prob. 9PSCh. 16 - Payout and taxes Which of the following U.S....
Ch. 16 - Prob. 11PSCh. 16 - Prob. 13PSCh. 16 - Information content of dividends What is meant by...Ch. 16 - Information content of dividends Does the good...Ch. 16 - Prob. 16PSCh. 16 - Repurchases and the DCF model Little Oil has 1...Ch. 16 - Dividends and value We stated in Section 16-3 that...Ch. 16 - Prob. 19PSCh. 16 - Repurchases and the DCF model House of Haddock has...Ch. 16 - Prob. 21PSCh. 16 - Prob. 22PSCh. 16 - Repurchases and the DCF model Hors dAge...Ch. 16 - Repurchases An article on stock repurchase in the...Ch. 16 - Prob. 25PSCh. 16 - Information content of dividends Generous dividend...Ch. 16 - Repurchases and EPS Many companies use stock...Ch. 16 - Prob. 28PSCh. 16 - Dividend policy and the dividend discount model...Ch. 16 - Prob. 30PS
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- Ignoring possible tax effects and signaling costs, the total value of a firm’s equity remains the same irrespective of how the firm distributes its residual earnings—dividends or stock repurchases. Each distribution method has certain advantages and disadvantages. Based on your understanding of dividends and stock repurchases, select the best terms to go with the statements. Management is likely to repurchase stock if it believes that the stock is undervalued/overvalued ; this sends positive signals to investors. True or False: Based on the company’s earnings in a particular year, repurchases can be made on an ad hoc basis without sending any negative signals to investors. True False Repurchases are also used to make significant adjustments to a firm’s liquidity/debt to equity ratio. True or False: Repurchases are more dependable than dividends because the investor wealth does not decrease after a repurchase, whereas the stock price decreases…arrow_forwardInvestors who wish to avoid paying taxes in the present are typically . A. low-dividend clientele B. high-dividend clientele C. drawn to firms that have erratic dividend policies D. none of the abovearrow_forwardTrue or False: The following statement accurately describes how firms make decisions related to issuing new common stock. Taking flotation costs into account will reduce the cost of new common stock. False: Flotation costs are additional costs associated with raising new common stock. True: Taking flotation costs into account will reduce the cost of new common stock, because you will multiply the cost of new common stock by 1 minus the flotation cost—similar to how the after-tax cost of debt is calculated. Alpha Moose Transporters is considering investing in a one-year project that requires an initial investment of $475,000. To do so, it will have to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $595,000. The rate of return that Alpha Moose expects to earn on its project (net of its flotation costs) is (18.25, 20.53, 22.81, 14.83) (rounded to two decimal…arrow_forward
- Which of the following statements is correct? a. Companies may pay too high a price in a large open market repurchase if it takes too long to complete. b. If a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase. c. An investor's capital gains from selling stock in a repurchase are always taxed at a higher rate than if the distribution were dividends. d. The tax code encourages companies to pay dividends rather than reinvest earnings. e. The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.arrow_forwardFAMA is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate FAMA pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue? a. The times interest earned ratio will decrease. b. The ROA will decline. c. Taxable income will decrease. d. The tax bill will increase. e. Net income will decrease. Please explain answer.arrow_forwardWhich of the following situation in which the quality of the company’s pay-out to shareholders may decline a. Decrease in cash position b. Increase in positive NPV investment opportunities c. Increase in capital gains tax d. Decrease in marginal tax rate on dividends Which of the following concepts tells us that dividends are to be paid only when the capital budget has been already supplied? a. Gordon Growth model b. Dividend irrelevance theory c. Retain Earnings break-point principle d. Residual Dividend Modelarrow_forward
- which one is correct please confirm? QUESTION 21 Finance researcher Myron Gordon argues that ____. a. the clientele effect has no influence on share value b. the existence of transaction costs has no impact on the dividend decision c. dividends reduce uncertainty, and thus the payment of dividends will increase the firm's value d. risk-averse shareholders may prefer some dividends over the promise of future capital gains if the interest rate is expected to declinearrow_forwardSuppose that a new government is elected and it changes the law applying to firms to:• Allow dividend payments to be tax deductible• Stop interest expense on debt from being tax deductibleHolding other factors constant, and assuming that firms seek to maintain an optimal capital structure in accordance with trade-off theory, what would you expect to happen to the debt ratio of a firm with both equity and debt in its capital structure?a. An increase in the debt ratiob. A decrease in the debt ratioc. The debt ratio would be unchangedd. The debt ratio would doublee. None of the above or it is not possible to sayarrow_forwardWhen a stock repurchase occurs, which of the following is not correct?a. EPS decreasesb. Shares are repurchased then cancelledc. Investors may regard this as a tax break compared to a dividend paymentd. Costs in servicing small shareholders may be reducede. All of the above are correctarrow_forward
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