Question

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According to Modigliani and Miller and the dividend irrelevance argument which of the following statements is...

According to Modigliani and Miller and the dividend irrelevance argument which of the following statements is true?

a.

Only firms with temporary excess cash should pay a dividend.

b.

Regardless of the tax treatment of dividends, investors prefer dividends since they receive cash today as opposed to postponing receiving capital gains.

c.

Firms pay the same total return (dividends and price appreciation combined) so without tax differences investors should be indifferent to receiving their returns as dividends of price appreciation.

d.

Dividends have historically been taxed a different rate than capital gains making them less attractive to investors.

Which of the following is not a reason comparing the dividend yield and dividend payout to comparable firms might be misleading?

a.

It assumes all firms in the industry have the same reinvestment needs.

b.

It should also include stock buybacks.

c.

The entire industry may have an unsustainable dividend policy.

d.

Firms in the industry should face similar risks and have similar investment needs.

In which of the following circumstances will the firm have the most pressure to pay out more in dividends?

a.

The firm has good projects and pays out less than available from FCFE.

b.

The firm has poor projects and pays out less than available from FCFE.

c.

The firm has poor projects and pays out more than available from FCFE.

d.

The firm has good projects and pays out more than available from FCFE.

What is the term for the date that an investor must have bought the share by in order to receive a dividend.

a.

Ex-dividend date.

b.

Dividend payment date.

c.

Dividend declaration date.

d.

Holder-of-record date.

Solutions

Expert Solution

1. According to Modigliani and Miller and the dividend irrelevance argument which of the following statements is true?

According to Modigliani and Miller the value of the firm does not change with dividend given to shareholder. When the dividend is given to shareholder the price of the share goes down by the dividend amount.

Answer is c (Firms pay the same total return (dividends and price appreciation combined) so without tax differences investors should be indifferent to receiving their returns as dividends of price appreciation.)

2. Which of the following is not a reason comparing the dividend yield and dividend payout to comparable firms might be misleading?

The comparison of dividend yield and dividend payout with comparable firms cannot be misleading if it does not include stock buyback as stock buybacks just the process to reduce the number of shares traded in public. It do not plays role in either giving dividends or dividend payout ratio.

Answer is b

3. In which of the following circumstances will the firm have the most pressure to pay out more in dividends?

When the firm has good projects , and paying less in dividend will have high Free Cash Flow , which puts pressure on the firm to give more in dividends

Answer is a

4. What is the term for the date that an investor must have bought the share by in order to receive a dividend.

Ex- dividend date - It is the date upto which the investor should purchase the stock, to become eligible for the dividend . The share after the ex-dividend date will trade at price less dividend amount.

Answer is a

jeff jeffy answered 1 week ago
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