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C-1 CASE SOLUTIONS
CHAPTER 16
ELECTRONIC TIMING, INC.
1. The one-time dividend will not affect the stock price. The value of the company will decline by the
amount of the dividend. Ignoring taxes, shareholder wealth will not be affected because the stock price
2. The value of the company could increase or decrease. If the company is over-levered, paying off debt
can lower the interest rate on debt, and decrease financial distress costs. If there are no financial distress
3. The PE ratio will fall from its current level, but will be the same under both the dividend and the
4. A regular dividend payment is something the company should probably not undertake. A company
rarely begins regular dividend payments that it will be unable to continue in the future. Cessation of
5. The implication is that the company should not retain earnings unless the ROE of the new project is
greater than the shareholders’ required return on equity. This is an intuitive result. Shareholders want
6. The decision does depend on the organizational form of the company. Money paid to shareholders of
a corporation are dividends, and currently taxed at the lower dividend tax rate. Money paid to the
