From the list below, select all the statements about payout policy that are correct. 1. Most...

From the list below, select all the statements about payout policy that are correct.

		1. Most of the practical differences between share repurchases and dividends is due to taxes and transaction costs.
		2. Payouts--whether they are dividends or share repurchases--are irrelevant.
		3. Share repurchases artificially inflate the market value of the firm, relative to common dividends, and are thus are mostly banned by the SEC as a form of stock manipulation.
		4. Never paying dividends or conducting share repurchases can make agency conflicts worse by leaving more cash in the firm for management to waste.
		5. Financial markets often interpret changes in payout policy as a signal from management about the firm's current and future performance.

Solutions

Expert Solution

1. True.

Most of the practical differences betweem share repurchase and dividend is due to taxes and transaction costs. Companies typically payout dividends from after tax profits. Once received shareholders must also pay taxes on dividends, albeit at a favourable tax rate in many jurisdictions.

2. True-

Dividends are irrelevant- Modigliani Miller support irrelevance. Investors are indifferent between dividends and retention generated capital gains.

The mofilgliani miller didividend irrelevance proposition states that in perfect capital markets, holding fixed the investment policy of a firm, the firm's choice of dividend policy is irrelevant and doesnot affect the inital share price.

3. False

It is the price rigging that may be used by traders to artificially inflate the price of a stock to lure in more investors. As new investors buy up shares, share prices increase in value untill the manipulators sell off, which causes share prices to collapse.

4. False.

A company that is still growing rapidly usually wont pay dividends because it wants to invest as musch as possible into further growth.

jeff jeffy answered 1 year ago

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