DIVIDENDS AND DIVIDEND POLICY
Answers to Concepts Review and Critical Thinking Questions
1. Dividend policy deals with the timing of dividend payments, not the amounts ultimately paid. Dividend
2. A stock repurchase reduces equity while leaving debt unchanged. The debt ratio rises. A firm could, if
desired, use excess cash to reduce debt instead. This is a capital structure decision.
3. Friday, December 29 is the ex-dividend day. Remember not to count January 1 because it is a holiday,
4. No, because the money could be better invested in stocks that pay dividends in cash which benefit the
5. The change in price is due to the change in dividends, not due to the change in dividend policy.
Dividend policy can still be irrelevant without a contradiction.
6. The stock price dropped because of an expected drop in future dividends. Since the stock price is the
7. The plan will probably have little effect on shareholder wealth. The shareholders can reinvest on their
own, and the shareholders must pay the taxes on the dividends either way. However, the shareholders
8. If these firms just went public, they probably did so because they were growing and needed the
additional capital. Growth firms typically pay very small cash dividends, if they pay a dividend at all.
9. The stock price drop on the ex-dividend date should be lower. With taxes, stock prices should drop by
10. With a high tax on dividends and a low tax on capital gains, investors, in general, will prefer capital
gains. If the dividend tax rate declines, the attractiveness of dividends increases.