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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Textbook Question
Chapter 16, Problem 2PS
Company dividend policy Here are several “facts” about typical corporate dividend policies. Which are true and which false?
- a. Companies decide each year’s dividend by looking at their capital expenditure requirements and then distributing whatever cash is left over.
- b. Managers and investors seem more concerned with dividend changes than with dividend levels.
- c. Managers often increase dividends temporarily when earnings are unexpectedly high for a year or two.
- d. Companies undertaking substantial share repurchases usually finance them with an offsetting reduction in cash dividends.
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Students have asked these similar questions
1) What is meant by the term 'dividend policy'?A) The desired pattern of dividends over time when a company determines the proportion of profits to be paid out to shareholders, usually done periodicallyB) The selection of specific groups of shareholders to receive dividends this yearC) The balance to be struck between paying interim dividends and final dividendsD) The determination of the dividend policies of industrial firms by government, designed to encourage earnings retention for investment
A company’s dividend policy refers to the manner in which a firm distributes its earnings to shareholders. Firms can pay out cash in one of two ways: a dividend or a share repurchase. Before 1983, stock repurchases were fairly rare, but today they are common. When a firm decides to pay a dividend, it usually follows the following process.
Several critical dates play a role in the dividend payment procedure. In the following table, identify the critical dividend dates. Check boxes that apply for each:
Declaration Date
Ex-Dividend Date
Payment Date
Holder-of-Record Date
Dividend checks are sent to shareholders.
Shares purchased on or after this date do not entitle investors to the stock’s dividend.
All shareholders as of this date will be mailed a dividend check.
The firm announces its intention to pay a dividend.
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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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- Stockholder Payout Rations Super Duper Corporation had a string of successful years. Super Dupers executives wish to examine how its stockholders have been compensated for their contributed capital. The following information pertains to Super Duper Corporation: Required: Calculate the dividend yield, dividend payout, and total payout.arrow_forwardDeciding how much earnings to retain and how much to return to ordinary shareholders is a key partof dividend policy. Drawing on the dividend policy literature critically discuss some of the factors thatneed to be considered by senior managers of a listed company when deciding on:a) the size of the annual dividend to return to its shareholders and the practical issues that needto be considered when deciding on the size of the dividend payment.Squeezeco is currently deciding on the level and form of its next dividend. It is consideringthree options:i. A cash dividend payment of 15p per shareii. A 5% scrip dividendiii. A repurchase of 15 % of ordinary share capital at the current market priceExtracts form the company’s financial statements are given below £m £mOperating profit 24.5Taxation 7.8 Distributable earnings…arrow_forwardShares repurchase and the previous problem? Suppose the company had. Announce is going to repurchase $21,850 worth of stock instead of repairing a dividend. What effects would the transaction have on the equity of the firm? How many shares will be outstanding? What will the price per share before the repurchase? Ignoring tax effects, shows how the share repurchase is affectively the same as a cash dividend.arrow_forward
- If a firm strictly adheres to the residual dividend policy, a sale of new common stock by the company would suggest that The dividend payout ratio has remained constant. The dividend payout ratio is increasing. No dividends were paid for the year. The dividend payout ratio is decreasing. The dollar amount of investments has decreased.arrow_forwardModigliani & Miller show that dividend policy can also be considered irrelevant. Yet, unexpected increases in dividends are often closely followed by price increases, why? To clarify, when a firm pays a dividend the stock price should drop by the amount of the dividend on the ex-dividend date. Let's say a firm has 5 stockholders, each holding 1 share. The firm owns $2,000 in cash and $3,000 in other assets. So the firm is worth $5,000 (it owes no debt). Each stockholder's claim is worth: $5,000/5 = $1000. Now the firm declares a dividend of $100/share. They must pay out a total of: $100 x 5shares = $500. So after the dividend is paid the firm now has $1,500 in cash and $3,000 in other assets, for a total of $4,500. Dividing this by 5 stockholders, we find that each stockholders claim is $900. The same as if we take $1,000 less $100 dividend to get $900. The stockholder hasn't lost anything, he still has $1,000 in value, just $900 in the firm and $100 in cash now.…arrow_forwardThe price to earnings (P/E) ratio is an after-tax metric reflecting growth potential of the common stock of a corporation. P is the selling price (per share) of the common stock, and E is the after-tax earnings per year of a share of stock. A high P/E ratio, for example, indicates that a firm is in a high-growth industry (such as biotechnology) and that annual earnings are not as important to investors as the growth rate of the price of common stock is. Because a corporation can be assumed to have an indefinitely long life, the P/E ratio can be likened to the (P/A, i%,N) factor when N approaches infinity. For a certain transportation company, the P/E ratio is 12. What is the implied IRR for this relatively stable company?arrow_forward
- As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company’s stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $1.92 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 12.00% over the next year. After the next year, though, Portman’s dividend is expected to grow at a constant rate of 2.40% per year. Assuming that the market is in equilibrium, use the information just given to complete the table. Term Value Dividends one year from now (D₁) Horizon value (Pˆ1P̂1) Intrinsic value of Portman’s stock The risk-free rate (rRFrRF) is 3.00%, the market risk…arrow_forwardAs companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company’s stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $3.12 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 16.00% over the next year. After the next year, though, Portman’s dividend is expected to grow at a constant rate of 3.20% per year.arrow_forwardShould stockholder wealth maximization be thought of as a long-term or a short-term goal? For example, if one action increases a firm’s stock price from a current level of $20 to $25 in 6 months and then to $30 in 5 years but another action keeps the stock at $20 for several years but then increases it to $40 in 5 years, which action would be better? Think of some specific corporate actions that have these general tendencies.arrow_forward
- Except for one of the following the constant dividend growth model is useful to corporate managers because: a. the required rate of return of shareholders is related to the company's level of risk as perceived by investors. b. the dividend stream is influenced by earnings and profitability as well as the dividend policy of management c. the growth rate is related to the efficiency of the company in generating returns on equity d. inflation calculations are incorporated in the modelarrow_forwardThe earnings per share of a company decreased if the additional capital it wanted was obtained by issuing additional shares of stock. Please explain how this phenomenon comes about. Please also discuss how this decrease in EPS would affect a company’s decision whether to issue equity (shares of stock) or debt (a bond issue) for raising capital.arrow_forwardYou are considering purchasing the preferred stock of a firm but are concerned about its capacity to pay the dividend. To help allay that fear, you compute the times-preferred-dividend-earned ratio for the past three years from the following data taken from the firm’s financial statements: Year 20X1 20X2 20X3 Operating income $ 18,000,000 $ 16,000,000 $ 14,000,000 Interest 6,500,000 5,500,000 3,300,000 Taxes 4,200,000 4,800,000 5,400,000 Preferred dividends 1,500,000 800,000 700,000 Common dividends 2,500,000 3,500,000 — Round your answers to two decimal places. 20X1: 20X2: 20X3: What does your analysis indicate about the firm’s capacity to pay preferred stock dividends? Times preferred dividend earned has (declined or increased) each year, which indicates the firm's capacity to pay the dividend has (diminished or improved)arrow_forward
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