CORPORATE FIN.(LL)-W/ACCESS >CUSTOM<
11th Edition
ISBN: 9781260269901
Author: Ross
Publisher: MCG CUSTOM
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Chapter 19, Problem 19CQ
Summary Introduction
To determine: The Reasons for Dividend Policy being Irrelevant.
Introduction: Dividend Irrelevance Theory is a significant hypotheses concerning dividend policy in an undertaking. The creators Modigliani and Miller guaranteed that neither the cost of company's stock nor its cost of capital is influenced by its dividend policy. The organization's capacity to acquire cash and riskiness of its movement can affect its worth.
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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
The homemade dividend strategy argues that investors impose their dividend preference on the firm, is this true or false and why?
The bird in hand theory suggests that a company can reduce its cost of equity capital by reducing its dividend payout ratio. true or false and why?
A company can always increase its stock price by increasing its dividend payout ratio. true or false and why?
The issue as to whether dividend policy has an effect on share prices raises a question as to whether dividends paid out to stockholders are any more “certain” than the expected future dividends the stockholders hope to receive from retention of firm earnings. This is known as the bird-in-the-hand theory of dividend policy. Do you agree with this theory? Explain.
Chapter 19 Solutions
CORPORATE FIN.(LL)-W/ACCESS >CUSTOM<
Ch. 19 - Dividend Policy Irrelevance How is it possible...Ch. 19 - Stock Repurchases What is the impact of a stock...Ch. 19 - Dividend Policy It is sometimes suggested that...Ch. 19 - Dividend Chronology On Tuesday, December 8,...Ch. 19 - Prob. 5CQCh. 19 - Prob. 6CQCh. 19 - Dividends and Stock Price Last month, Central...Ch. 19 - Prob. 8CQCh. 19 - Dividend Policy For initial public offerings of...Ch. 19 - Investment and Dividends The Phew Charitable Trust...
Ch. 19 - Use the following information to answer the next...Ch. 19 - Stock Repurchases How do you think this tax law...Ch. 19 - Dividends and Stock Value The growing perpetuity...Ch. 19 - Bird-in-the-Hand Argument The bird-in-the-hand...Ch. 19 - Dividends and Income Preference The desire for...Ch. 19 - Dividends and Clientele Cap Henderson owns Neotech...Ch. 19 - Prob. 17CQCh. 19 - Prob. 18CQCh. 19 - Prob. 19CQCh. 19 - Prob. 20CQCh. 19 - Prob. 1QPCh. 19 - Stock Dividends The owners equity accounts for...Ch. 19 - Prob. 3QPCh. 19 - Stock Splits and Stock Dividends Roll Corporation...Ch. 19 - Prob. 5QPCh. 19 - Share Repurchase In the previous problem, suppose...Ch. 19 - Prob. 7QPCh. 19 - Prob. 8QPCh. 19 - Prob. 9QPCh. 19 - Prob. 10QPCh. 19 - Prob. 11QPCh. 19 - Prob. 12QPCh. 19 - Stock Repurchase Flychucker Corporation is...Ch. 19 - Prob. 14QPCh. 19 - Prob. 15QPCh. 19 - Prob. 16QPCh. 19 - Prob. 17QPCh. 19 - Prob. 18QPCh. 19 - Prob. 19QPCh. 19 - Prob. 20QPCh. 19 - Prob. 1MCCh. 19 - Jessica believes that the company should use the...Ch. 19 - Prob. 3MCCh. 19 - Another option discussed by Tom, Jessica, and...Ch. 19 - Prob. 5MCCh. 19 - Does the question of whether the company should...
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- 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_forwardDividend Policy. How is it possible that dividends are so important, but at the same time, dividend policy is irrelevant? If increases in dividends tend to be followed by (immediate) increases in share prices, how can it be said that dividend policy is irrelevant?arrow_forwardwhich 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_forward
- Using the dividend growth model, why would a firm be hesitant to reduce the growth rate of its dividends.arrow_forwardWhich one of the followings is incorrect regarding to cost of equity: On average, it is higher than cost of debt. It moves in the same direction with tax rates. It is affected by return on market portfolio. For a dividend paying company, it is sensitive to growth expectations for future dividends. It is highly dependent on risk level of the firm and growth rate. For calculating cost of equity, we can rely on dividend growth model or SML approach. Both models might suffer from the assumption that past is a good predictor of future. True False Percy's Wholesale Supply has earnings before interest and taxes of €106,000. Both the book and the market value of debt is €170,000. The unlevered cost of equity is 15.5 per cent while the pre-tax cost of debt is 8.6 per cent. The tax rate is 28 per cent. What is the firm's weighted average cost of capital? Show your steps.arrow_forwardHow does the market react to unexpected dividend changes? What does this tell us about dividendpolicy? How is it possible that dividends are so important, but at the same time, dividend policy isirrelevant?arrow_forward
- The Discounted Dividend Model and the Corporate Valuation Model are two different ways to determine the intrinsic value of a share of stock. The Models are similar but do have some differences. Please review the following statements and select all of the ones (and only the ones) that reflect the differences between the two models. a. The Corporate Valuation Model can be used for companies with uneven cashflow growth rates and the Discounted Dividend Model can not. b. The Discounted Dividend Model uses dividends as the cash flows while the Corporate Valuation Model uses Free Cash Flow (FCF). c. The Discounted Dividend Model uses the required rate of return on the stock to discount the cash flows while the Corporate Valuation Model uses the Weighted Average Cost of Capital (WACC) to discount the cash flows. d. The Corporate Valuation Model requires you to back out the value of the firm's debt and preferred stock from your estimate of the corporation's…arrow_forwardIf the Modigliani and Miller hypothesis about dividends is correct, and if one found a group of companies which differed only with respect to dividend policy, which of the following statements would be most correct? Group of answer choices None of these statements is true. All of these statements are true. The total expected return, which in equilibrium is also equal to the required return, would be higher for those companies with lower payout ratios because of the greater risk associated with capital gains versus dividends. If the expected total return of each of the sample companies were divided into a dividend yield and a growth rate, and then a scatter diagram (or regression) analysis were undertaken, then the slope of the regression line (or b in the equation D1/P0 = a + b(g)) would be equal to +1.0. The residual dividend model should not be used, because it is inconsistent with the MM dividend hypothesis.arrow_forwardThe 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; nevertheless, proponents of this theory argue that this will have no significant impact on share price. Is this true or falsearrow_forward
- A firm’s value depends on its expected free cash flow and its cost of capital. Distributions made in the form of dividends or stock repurchases impact the firm’s value and the investors in different ways. Some analysts have argued that a firm’s value should solely be determined by its basic earning power and the business risk of the firm. Which of these concepts would support these analysts’ argument? The signaling hypothesis The residual dividend model The clientele effect Dividend irrelevance theoryarrow_forwardIs this statement true or false? Give a reason for your answer. "The bird-in-hand theory suggests that a company can reduce its cost of equity capital by reducing its dividend payout ratio."arrow_forwardWhich one of the following statements about dividend policies is FALSE? a. One advantage of dividend reinvestment plans is that they allow shareholders to maintain a position in a company with minimal trading. b. One key disadvantage of a residual dividend policy is that it makes it hard for a company to follow a stable dividend policy. c. The clientele effect suggests that brokerage companies should choose customers whose dividend preferences match those of their client service borkers. d. The "bird-in-the-hand effect" is the argument that investors prefer dividends to capital gains because dividends are more certain than capital gains. e. In today's tax environment, gains through stock repurchases and dividend payments are taxed at the same ratearrow_forward
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