CHAPTER 15: Discussion Questions and Problems
1. Differentiate the following terms/concepts:
a. Clienteles and catering
A clientele is a group of investors with similar characteristics or preferences. Catering is
b. Dividend payment and home-made dividend
A dividend payment is a cash transfer from a corporation to shareholders. If a particular
c. Investor sentiment and irrationality
d. Synergy and valuation consequences of a merger
A synergy exists if 2+2=5. In other words, if two firms merge and the value of the
2. One of John Lintner’s conclusions in his classic study of dividend policy is that
managers do not seem to change dividend payment in response to capital
requirements for new investment (Lintner, J., 1956, “Distributions of incomes of
corporations among dividends, retained earnings and taxes,” American Economic
Review 46, 97-113). Consider this finding in light of the chapter discussion.
If there are clienteles that prefer a certain dividend policy, this means that some of the
3. You work for Toxic Waste, Inc. Given the evidence that the market can
respond well to a company name change, suggest a new company name to the
CEO, and explain why you think it might positively impact the share price.
4. Suppose a particular investment is believed by management to be a
negative-NPV undertaking, but many shareholders believe otherwise, holding
the view that investments of this type are value-creating. What should be done?
Discuss in the context of the heuristic model presented in the chapter.
5. A company has 1,000,000 shares outstanding trading at $15 apiece.
Managers believe that the discount rate appropriate for the risk borne is 15% and
total cashflows, expected to be $1 million next year, will rise by 5% per year
indefinitely. Discuss a strategy that is beneficial to the current shareholders.