A) Miller and Modigliani argued that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the "bird-in-the-hand" effect.
B) One reason that companies tend to favor distributing excess cash as dividends rather than by repurchasing stock is that dividends are normally taxed at a lower rate than gains on repurchased stock.
C) One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.
D) One key advantage of the residual dividend model is that it enables a company to follow a stable dividend policy.
E) The clientele effect suggests that companies should follow a stable dividend policy.
G) B) and C)
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A) $ 898,750; 55.63%
B) $ 943,688; 58.41%
C) $ 990,872; 61.34%
D) $1,040,415; 64.40%
E) $1,092,436; 67.62%
G) B) and E)
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A) 25.36%
B) 28.17%
C) 31.30%
D) 34.78%
E) 38.26%
G) B) and D)
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A) the same dividend as it paid the prior year.
B) no dividends to common stockholders.
C) dividends only out of funds raised by the sale of new common stock.
D) dividends only out of funds raised by borrowing money (i.e., issuing debt) .
E) dividends only out of funds raised by selling off fixed assets.
G) A) and D)
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B) False
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A) $133.0; $ 85.5; $389.6
B) $140.0; $ 90.0; $410.1
C) $147.4; $ 94.8; $431.7
D) $155.2; $ 99.8; $454.4
E) $163.3; $105.0; $478.3
G) D) and E)
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A) -$2,741,538
B) -$3,046,154
C) -$3,384,615
D) -$3,723,077
E) -$4,095,385
G) A) and D)
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C
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A) One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their investment in the company.
B) One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account.
C) Stock repurchases can be used by a firm that wants to increase its debt ratio.
D) Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities.
E) One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding.
G) B) and E)
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A) You will have 200 shares of stock, and the stock will trade at or near $120 a share.
B) You will have 200 shares of stock, and the stock will trade at or near $60 a share.
C) You will have 100 shares of stock, and the stock will trade at or near $60 a share.
D) You will have 50 shares of stock, and the stock will trade at or near $120 a share.
E) You will have 50 shares of stock, and the stock will trade at or near $600 a share.
G) A) and E)
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B) False
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False
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A) Stock repurchases can be used by a firm as part of a plan to change its capital structure.
B) After a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise.
C) Investors may interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued, or, alternatively, as a signal that the firm does not have many good investment opportunities.
D) A company can repurchase stock to distribute a large one-time cash inflow, say from the sale of a division, to stockholders without having to increase its regular dividend.
E) Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan.
G) A) and E)
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B) False
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A) If a firm repurchases some of its stock in the open market, then shareholders who sell their stock for more than they paid for it will be subject to capital gains taxes.
B) An open-market dividend reinvestment plan will be most attractive to companies that need new equity and would otherwise have to issue additional shares of common stock through investment bankers.
C) Stock repurchases tend to reduce financial leverage.
D) If a company declares a 2-for-1 stock split, its stock price should roughly double.
E) One advantage of adopting the residual dividend model is that this makes it easier for corporations to meet the requirements of Modigliani and Miller's dividend clientele theory.
G) A) and C)
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B) False
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True
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A) If a company has a 2-for-1 stock split, its stock price should roughly double.
B) Capital gains earned on shares repurchased are taxed less favorably than dividends, which is why companies typically pay dividends and avoid share repurchases.
C) Very often, a company's stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen.
D) Stock repurchases increase the number of outstanding shares.
E) The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter.
G) A) and D)
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A) When firms are deciding on the size of stock splits--say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.
B) Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices. However, this was determined to be a deceptive practice, and reverse splits are illegal today.
C) Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits.
D) When a company declares a stock split, the price of the stock typically declines--for example, by about 50% after a 2-for-1 split--and this necessarily reduces the total market value of the firm's equity.
E) If a firm's stock price is quite high relative to most stocks--say $500 per share--then it can declare a stock split of say 20-for-1 so as to bring the price down to something close to $25. Moreover, if the price is relatively low--say $2 per share--then it can declare a "reverse split" of say 1-for-10 so as to bring the price up to somewhere around $20 per share.
G) None of the above
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A) The firm's ability to accelerate or delay investment projects without adverse consequences.
B) A strong preference by most of its shareholders for current cash income versus potential future capital gains.
C) Constraints imposed by the firm's bond indenture.
D) The fact that much of the firm's equipment is leased rather than bought and owned.
E) The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains.
G) D) and E)
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A) $45,125
B) $47,500
C) $50,000
D) $52,500
E) $55,125
G) D) and E)
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B) False
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A) $462,983; $244,352
B) $487,350; $257,213
C) $513,000; $270,750
D) $540,000; $285,000
E) $ 0; $300,000
G) A) and B)
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