Chapter 14: Distributions to Shareholders: Dividends and Repurchases Questions

Chapter 14: Distributions to Shareholders: Dividends and Repurchases Questions
Book Title: Financial Management: Theory and Practice
(14-1)
Define each of the following terms:
a. Optimal distribution policy
b. Dividend irrelevance theory; bird-in-the-hand theory; tax effect theory
c. Signaling hypothesis; clientele effect
d. Residual distribution model; extra dividend
e. Declaration date; holder-of-record date; ex-dividend date; payment date
f. Dividend reinvestment plan (DRIP)
g. Stock split; stock dividend; stock repurchase
e. A decline in investment opportunities
(14-5)
Indicate whether the following statements are true or false. If the statement is false, explain why.
a. If a firm repurchases its stock in the open market, the shareholders who tender the stock are subject to capital gains taxes.
b. If you own 100 shares in a company’s stock and the company’s stock splits 2-for-1, then you will own 200 shares in the company following the split.
c. Some dividend reinvestment plans increase the amount of equity capital available to the firm.
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(14-4)
One position expressed in the financial literature is that firms set their dividends as a residual after using income to support new investments. Explain what a residual policy implies (assuming that all distributions are in the form of dividends), illustrating your answer with a table showing how different investment opportunities could lead to different dividend payout ratios.
f. Permission for corporations to deduct dividends for tax purposes as they now do interest charges
g. A change in the Tax Code so that both realized and unrealized capital gains
in any year were taxed at the same rate as dividends
(14-3)
What is the difference between a stock dividend and a stock split? As a stockholder, would you prefer to see your company declare a 100% stock dividend or a 2-for-1 split? Assume that either action is feasible.
d. The Tax Code encourages companies to pay a large percentage of their net income in the form of dividends.
e. A company that has established a clientele of investors who prefer large dividends is unlikely to adopt a residual dividend policy.
f. If a firm follows a residual dividend policy then, holding all else constant, its dividend payout will tend to rise whenever the firm’s investment opportunities improve.

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