Question

In: Finance

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 6 months ago
Next > < Previous

Related Solutions

Explain the Modigliani & Miller (M&M) capital structure irrelevance principle
Explain the Modigliani & Miller (M&M) capital structure irrelevance principle
Outline reasons why Modigliani-Miller irrelevance of dividend policy may not hold. Explain what roles taxes, transaction...
Outline reasons why Modigliani-Miller irrelevance of dividend policy may not hold. Explain what roles taxes, transaction costs, and signalling play in theories of dividend policy.
The capital structure irrelevance theory proposed by Modigliani and Miller (MM) is often criticized to be...
The capital structure irrelevance theory proposed by Modigliani and Miller (MM) is often criticized to be based on very restrictive assumptions which are unrealistic in the world today. However, the theory is still considered extremely important. (word limit 400) a. Why it is important? b. Illustrate three main assumptions made by MM and discuss how the problems are tackled by alternative capital structure theories.
Discuss what may lead to a breakdown of the Modigliani-Miller irrelevance theorem, and give an overview...
Discuss what may lead to a breakdown of the Modigliani-Miller irrelevance theorem, and give an overview of the trade-off theory and the pecking-order theory of capital structure.
Miller and Modigliani also studied dividend policy and determined that in their world of perfect capital...
Miller and Modigliani also studied dividend policy and determined that in their world of perfect capital markets (no taxes, no bankruptcy costs, no asymmetric information) that dividend policy DOES matter. True False When a firm is young and growing, managers tend to have high dividend payout ratios in an attempt to encourage investors to buy the stock. True False Equity provides more financial flexibility for a firm than debt. True False Issuing debt rather than equity will automatically increase a...
The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it...
The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it forms the basis for modern thinking on the capital structure of a firm. The MM theorem represents what could possibly be the most important theory in respect of the effects of the Capital structure of a firm and the value of that firm. Despite the enormous efforts by Modigliani and Miller and the entire time spent by numerous scholars critiquing this theory, the MM...
The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it...
The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it forms the basis for modern thinking on the capital structure of a firm. The MM theorem represents what could possibly be the most important theory in respect of the effects of the Capital structure of a firm and the value of that firm. Despite the enormous efforts by Modigliani and Miller and the entire time spent by numerous scholars critiquing this theory, the MM...
The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it...
The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it forms the basis for modern thinking on the capital structure of a firm. The MM theorem represents what could possibly be the most important theory in respect of the effects of the Capital structure of a firm and the value of that firm. Despite the enormous efforts by Modigliani and Miller and the entire time spent by numerous scholars critiquing this theory, the MM...
The following information relates to two companies which trade in a Modigliani and Miller world:
Question 2: Capital structure and dividend policy.          The following information relates to two companies which trade in a Modigliani and Miller world: Sanlam                          Santam Cost of equity 20% 18% Cost of debt 12% - Dividends 200 000 432 000 Interest 150 000 - Shares 1000 1000 Suppose Sanlam ltd wishes to finance a major restructuring project whose total cost is N$75 Million. The company follows a residual policy on dividends. Earnings for the coming year are...
Explain the “Dividend Irrelevance” theory and the “Dividend Preference” theory of dividends. Which of these is...
Explain the “Dividend Irrelevance” theory and the “Dividend Preference” theory of dividends. Which of these is theoretically the most justified? Is there any real-world evidence that either one might be the most relevant? (7 pts.)
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT