DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE REPURCHASES
Microsoft Shifts Gears and Begins to Unload Part of Its Vast Cash Hoard
Explain briefly the ideas behind the dividend irrelevance theory.
What did Modigliani and Miller assume about taxes and brokerage
costs when they developed their dividend irrelevance theory?
Why did MM refer to the Gordon Lintner dividend argument as the
bird-in-the-hand fallacy?
Why do some investors prefer high-dividend-paying stocks?
Why might other investors prefer low-dividend-paying stocks?
Define (1) information content and (2) the clientele effect, and explain how they affect dividend policy.
Explain the logic of the residual dividend model, the steps a firm
would take to implement it, and why it is more likely to be used to
establish a long-run payout target than to set the actual year-by-year
payout ratio.
How do firms use long-run planning models to help set dividend
policy?
Which are more critical to the dividend decision, earnings or cash
flow? Explain.
Explain the procedures used to actually pay the dividend.
Why is the ex-dividend date important to investors?
A firm has a capital budget of $30 million, net income of $35 million, and a target capital structure of 45 percent debt and 55 percent equity.
If the residual dividend policy were used, what would its dividend payout ratio be? (52.86%)
What are dividend reinvestment plans?
What are their advantages and disadvantages from both the stock-
holders’ and the firm’s perspectives?
Identify the four broad sets of factors that affect dividend policy.
What constraints affect dividend policy?
How do investment opportunities affect dividend policy?
How do the availability and cost of outside capital affect dividend
policy?
What are stock dividends and stock splits?
How do stock dividends and splits affect stock prices?
In what situation should a firm pay a stock dividend?
In what situation should a firm split its stock?
Suppose you have 100 common shares of Tillman Industries. The
EPS is $4.00, the DPS is $2.00, and the stock sells for $60 per share.
Now Tillman announces a two-for-one split. Immediately after the
split, how many shares will you have, what will the adjusted EPS
and DPS be, and what would you expect the stock price to be? (200
shares; $2.00; $1.00; probably a little over $30)
Explain how repurchases can (1) help stockholders hold down taxes
and (2) help firms change their capital structures.
What is treasury stock?
What are the three procedures a firm can use to repurchase its stock?
What are some advantages and disadvantages of stock repurchases?
How can stock repurchases help a company operate in accordance
with the residual dividend model?