Review Q's Chap 14

14-1
The two ways that the company can distribute its cash to shareholder are:
1. Stock repurchase
2. Dividends
14-2
Rapidly developing companies will frequently not pay dividends because they require more cash to
spend back into the business.
This extra cash reinvested in the company will generate higher returns in the future, growing the
company's worth.
14-3
When a company's earnings are badly harmed during a recession, the company's profits are negatively
affected. Dividends will be reduced, but not as much as earnings.
However, when the economy is performing well, the company's earnings will climb. However, as was the
case before the crisis, the dividend increase will be modest while the firm considers its long-term
dividend strategy.
14-4
A holder of record is the name of the person who is the registered owner of a security and who has the
rights, benefits, and obligations that come with ownership.
Ex-dividends are the two business days preceding the record date when a stock can be sold without
receiving the current dividend.
14-5
The company pays taxes on its income, and any dividends distributed to shareholders are taxable in
their hands.
The after-tax cash dividends from shareholders grew considerably due to the reduced tax rates.
As a result, before the 2003 Act, the corporation started paying out higher dividends.
The corporate pay-out ratio increased dramatically after the 2003 Act.
14-6
DRIP participants benefit from the fact that they may purchase shares directly from the firm without
paying a broker or third-party costs.
The corporation will benefit from DRIP since it can issue extra market shares without worrying about
selling them.
14-7
No, this will not result in consistent dividends since investment possibilities change from one period to
the next, causing investment amounts to fluctuate and, as a result, payment amounts to fluctuate as
well.
Dividends are thus meaningless, and payout policy has no bearing on the firm's value.
14-8
The percentage of retained earnings utilized for dividends vs reinvestment has no influence on the
company's value.
Adjustments in share price in reaction to dividend increases or cutbacks, according to M & M, are
related to the informational content of dividends, which indicates to investors that management
expects future earnings to shift in the same direction as payout adjustments.
The clientele effect asserts that investors choose firms with dividend policies that reflect their tastes,
which is another component of M & M's theory. Dividend policies have minimal effect on the value of a
company's shares since shareholders receive what they anticipate.
On the other hand, the dividend relevance theory contends that a firm's payment policy and market
value are inextricably linked.
According to the bird-in-the-hand argument, investors are typically risk-averse, and current dividends
reduce investor uncertainty by decreasing the discount rate applied to profits, increasing share value.
14-9
The 5 factors that companies consider in establishing a dividend policy are:
1. Legal constraints - A corporation's legal capital cannot be utilized to pay cash dividends in any
amount.
2. Contractual constraints - It limits the firm's ability to pay dividends by including restrictive
covenants in the loan agreement.
3. Growth prospects - It prevents the company from paying out all of the available cash to
shareholders as dividends since the company will need a portion or all of the earnings for
investment purposes when the growth potential is high.
4. Owner consideration - The company's dividend policy should benefit most of its owners' wealth.
5. Market consideration - Catering theory is one of the most current ideas presented to explain a
company's payout decision.
14-10
A constant dividend payout ratio policy consistently maintains the percentage of earnings paid out in
dividends.
Companies that have a regular dividend policy distribute dividends to shareholders once a year.
The low regular plus extra plan pays low regular payouts plus year-end bonuses in great years.
Investors are unsure of the cash amount they will receive as a dividend under the constant payout ratio
dividend policy.
Even if the percentage is constant, the dividend amount is variable and depends on earnings that may or
may not meet their expectations.
Because they are set, and permanent, regular dividend plans and low regular and additional dividend
policies give certainty about the dollar amount of payments.
A low regular and extra dividend policy provides an additional advantage during large profits. Still,
regardless of the circumstances, they will get a fixed part of the amount as a dividend.
14-11
Companies pay out stock dividends because the benefits outweigh the costs.
The notion that the shareholder will break even with the 20% equity dividend in 5 years is inaccurate.
When a stock dividend is issued instead of a cash dividend, the share's per-share value is reduced by the
amount of the payout.
This will neither raise the shareholder's value nor increase the firm's proportion of ownership.
Even after the stock dividend, the total stockholder's equity will stay unchanged.
14-12
When we compare these two definitions, we can see that they both increase the number of outstanding
shares.
However, the increase in shares outstanding will be larger in the case of a stock split.
Furthermore, if a stock split occurs rather than a stock dividend, the value of the share would decrease.

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14-1

The 5 factors that companies consider in establishing a dividend policy are:

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