Corporate Finance, Student Value Edition (4th Edition)
4th Edition
ISBN: 9780134101446
Author: Berk, Jonathan; DeMarzo, Peter
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 17, Problem 20P
A stock that you know is held by long-term individual investors paid a large one-time dividend. You notice that the price drop on the ex-dividend date is about the size of the dividend payment. You find this relationship puzzling given the tax disadvantage of dividends. Explain how the dividend-capture theory might account for this behavior.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Based upon the empirical evidence, state whether the following statements are true or false, and briefly explain why.
a). Firms are reluctant to change dividends.
b). Stock prices generally go up on the ex-dividend date by less than the amount of the dividend in classic tax system.
c). Increasing dividend payments to stockholders generally makes bondholders in the firm better off.
d). Dividends create a tax disadvantage for investors even when tax rates on dividends and capital gain is the same.
When 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 correct
Explain the following Motives for repurchasing shares:
-Signal that the stock is undervalued.
-Flexibility of distributing cash without the expectation of cash dividends.
-Tax efficiency when the tax rate on capital gains is less than that of cash dividends.
Offset share increases from executive stock options.
Chapter 17 Solutions
Corporate Finance, Student Value Edition (4th Edition)
Ch. 17.1 - Prob. 1CCCh. 17.1 - Prob. 2CCCh. 17.2 - Prob. 1CCCh. 17.2 - In a perfect capital market, how important is the...Ch. 17.3 - Prob. 1CCCh. 17.3 - Prob. 2CCCh. 17.4 - Prob. 1CCCh. 17.4 - Prob. 2CCCh. 17.5 - Is there an advantage for a firm to retain its...Ch. 17.5 - Prob. 2CC
Ch. 17.6 - Prob. 1CCCh. 17.6 - Prob. 2CCCh. 17.7 - Prob. 1CCCh. 17.7 - Prob. 2CCCh. 17 - Prob. 1PCh. 17 - ABC Corporation announced that it will pay a...Ch. 17 - Prob. 3PCh. 17 - RFC Corp. has announced a 1 dividend. If RFCs...Ch. 17 - Prob. 5PCh. 17 - KMS Corporation has assets with a market value of...Ch. 17 - Natsam Corporation has 250 million of excess cash....Ch. 17 - Suppose the board of Natsam Corporation decided to...Ch. 17 - Prob. 9PCh. 17 - Suppose BE Press paid dividends at the end of each...Ch. 17 - The HNH Corporation will pay a constant dividend...Ch. 17 - Prob. 12PCh. 17 - Prob. 13PCh. 17 - Prob. 14PCh. 17 - Suppose that all capital gains are taxed at a 25%...Ch. 17 - Prob. 16PCh. 17 - Prob. 17PCh. 17 - Prob. 18PCh. 17 - Prob. 19PCh. 17 - A stock that you know is held by long-term...Ch. 17 - Clovix Corporation has 50 million in cash, 10...Ch. 17 - Assume capital markets are perfect. Kay Industries...Ch. 17 - Redo Problem 22., but assume that Kay must pay a...Ch. 17 - Harris Corporation has 250 million in cash, and...Ch. 17 - Redo Problem 22, but assume the following: a....Ch. 17 - Prob. 26PCh. 17 - Use the data in Table 15.3 to calculate the tax...Ch. 17 - Explain under which conditions an increase in the...Ch. 17 - Why is an announcement of a share repurchase...Ch. 17 - AMC Corporation currently has an enterprise value...Ch. 17 - Prob. 31PCh. 17 - Prob. 32PCh. 17 - Explain why most companies choose to pay stock...Ch. 17 - Prob. 34PCh. 17 - Prob. 35P
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- One position expressed in the financial literature is that firms set their dividends as a residual after using income to support new investments. Explain what a residual policy implies (assuming that all distributions are in the form of dividends), illustrating your answer with a table showing how different investment opportunities could lead to different dividend payout ratios.arrow_forwardIf payout policy is irrelevant or has no effect on firm value, then why do individuals have a preference on payout policy? Shefrin and Statman (1984) provide a really interesting illustration of why payout policy may be important to individual investors by highlighting a particular case of a dividend omission by Consolidated Edison in the 70s, which occurred after 89 years of uninterrupted dividends. One of the shareholder's statements concerning the missed dividend payment during the 1974 annual meeting was as follows: What are we to do? You give us shorthand answers. You don't know when the dividend is coming back. Who is going to pay my rent? I had a husband. Now Con Ed has to be my husband. (Shefrin et al., 1984, p. 276) An excellent and very readable summary questioning the dividend's relevance is provided by Black (1976) and a summary of the current state of the literature is found in Baker and Weigand (2015). The questions that you should consider for this discussion response…arrow_forwardIgnoring 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_forward
- 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 payoutarrow_forwardAs discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role of taxes, however, this is not necessarily true. One model has been proposed that incorporates tax effects into determining the ex-dividend price: (P0 – PX)/D = (1 – TP)/(1 – TG) Here P0 is the price just before the stock goes ex, PX is the ex-dividend share price, D is the amount of the dividend per share, TP is the relevant marginal personal tax rate on dividends, and TG is the effective marginal tax rate on capital gains. a. If TP = TG = 0, how much will the share price fall when the stock goes ex? multiple choice PX P0 D b. If TP = 16 percent and TG = 0, how much will the share price fall? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)…arrow_forwardIf you bought a share of common stock, you would probably expect to receive dividends plus an eventual capital gain. Would the distribution between the dividend yield and the capital gain yield be influenced by the firm’s decision to pay more dividends rather than to retain and reinvest more of its earnings?arrow_forward
- A firm is planning to borrow money to make an equity repurchase to increase its stock price. It is basing its analysis on the fact that there will be fewer shares outstanding after the repurchases, and higher earnings per share. There are no taxes. a. Will earnings per share always increase after such an action? Explain.b. Will the higher earnings per share always translate into a higher stock price? Explain.c. Under what conditions will such a transaction lead to a higher price?arrow_forwardWhich of the following statements is CORRECT? Group of answer choices When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation. Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the CAPM. If a company's beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company does not have enough reinvested earnings to take care of its equity financing and hence must issue new stock. Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.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
- When a company participates in a stock buyback program, it means that the company is buying shares of its own stock and taking them off the market. With this simple definition in mind, how would a company's stock buyback program affect its Earnings per Share?arrow_forwardCommon shares are the most important security issued by the companies to raise the funds. Since, return on common securities is not fixed due to which prices of the common shares also fluctuates. Which would be more appropriate for evaluating your company's stock price, a constant or non-constant growth model, and why? How would each of the factors used in these models impact your estimated value.arrow_forward. On the day an IPO comes out, the market pricecan rise above the offering price or fall below thatprice. Is it more common for the market price toclose above or below the offering price on the dayof an IPO? If a company’s market price rises abovethe IPO price, does that suggest that the companyleft money on the table and thus received less for its shares than it should have received? If mostcompanies do leave money on the table, does thatindicate the IPO market is inefficient? How mightsystematic underpricing be explained? Has theamount of underpricing been constant over time?Explain.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
9 Different Types of Stocks | Investing For Beginners; Author: Kiana Danial - Invest Diva;https://www.youtube.com/watch?v=CdJYcjZfCH0;License: Standard Youtube License