104. Why would payout decisions be used by management to signal the prospects of the firm?
105. Briefly discuss each of the chronological “steps” in the process of paying a dividend.
106. How will your investment in Acme Corp. change if you currently own 100 shares valued at
$10 each and Acme has just declared a 10% stock dividend? Before the stock dividend there
were 2,000 shares outstanding.
107. Congratulations! A stock of which you own 100 shares has just split three for two. Its
market price before the split was $30 per share. Now discuss what you would expect to happen
with this stock and your ownership interests.
108. Show that a stock repurchase is conceptually the same as a cash dividend for a
shareholder with 100 shares using the following example: Repo Corp. has 1,000 shares
outstanding at a market price of $20 per share. In debating whether to declare a 5% cash
dividend, the directors instead chose to repurchase 50 of the outstanding shares.
109. How does the information content of a repurchase program differ from that of a dividend
increase? Which signal has the more lasting result?
110. Discuss the concept of dividend “smoothing.”
111. Miller and Modigliani proclaim that, under certain ideal conditions, dividend policy is
irrelevant. What is it that they are specifically proclaiming to be irrelevant? Explain with the
following example. Assume that a firm has $100,000 in assets at market value, no debt, and 100
shares outstanding. Further, $10,000 of the assets are cash which represents the recent net
income of the firm. Now the firm can choose whether to pay out, say, a 50% dividend which will
necessitate the issuance of $5,000 in new shares, or to pay no dividend and plow back all
$10,000 of earnings into a project with an attractive NPV.
112. Suppose two equally risky shares, Div and Cap, offer the same expected return before
tax. Div shares pay a generous dividend but offer low expected capital gains. Cap shares pay low
dividends but offer high expected capital gains. Which one of the two shares would a pension
fund prefer? An individual? A corporation? Explain your answers.
113. Discuss the concept of dividend signaling.
114. Ignoring the idealized world of MM, why might a higher dividend payout ratio be
considered detrimental to firm value?
115. Use your knowledge of current corporate tax laws to show that a preferred stock with a
9% dividend might be preferred to a common stock having a 12% capital gain. Assume a 35% tax
rate.
116. Compare and contrast share repurchases with dividend payouts.
117. Why would dividend policy not affect firm value in an ideal world?
118. How might differences in the tax treatment of dividends and capital gains affect dividend
policy?