Question

In: Finance

Is the dividend policy irrelevant for the value of a stock? If so, why is it...

  • Is the dividend policy irrelevant for the value of a stock? If so, why is it the case that increases in dividend tend to be followed by increases in share prices?
  • What are some of the pros and cons of a company paying high dividends?
  • What in your view we still don't understand about dividend policy?
  • What is a rights offering and what is the rights offering puzzle?

Solutions

Expert Solution

1. Dividend policy is irrelevant for the value of the stock because it is to be the adjusted from value of the stock and hence dividend is not some additional appreciation in the total value of the stock.

The amoun of dividend is declared it will mean that it will have to be adjusted with the price of this stock and it was to be paid to the shareholders from those prices only so it is not some additional kind of appreciation in the overall value of share capital.

Increase in dividend will be followed by increase in share prices because it is taken in a a positive manner by the market that dividend has been declared by the company because-

A. Market believes that company is making high levels of profit to pay out the dividend

B. Markets also believes that the company has enough Liquidity in its hands and it is sitting on a high level of cash.

C. It also reflects the determination of the company to serve its share holders.


Related Solutions

Modigliani and Miller (M&M) hypothesized that both dividend policy and capital structure policy are irrelevant in...
Modigliani and Miller (M&M) hypothesized that both dividend policy and capital structure policy are irrelevant in determining the value of a firm. Outline the arguments they used to reach their positions, including the assumptions underlying those arguments. With reference to relevant academic literature, discuss at least one reason why the M&M hypotheses might not hold in practice for BOTH dividend and capital structure policy.
Why might a stock dividend or a stock split be of limited value to an investor?...
Why might a stock dividend or a stock split be of limited value to an investor? - 5 points needed
Modigliani & Miller show that dividend policy can also be considered irrelevant. Yet, unexpected increases in...
Modigliani & Miller show that dividend policy can also be considered irrelevant. Yet, unexpected increases in dividends are often closely followed by price increases, why? To clarify, when a firm pays a dividend the stock price should drop by the amount of the dividend on the ex-dividend date. Let's say a firm has 5 stockholders, each holding 1 share. The firm owns $2,000 in cash and $3,000 in other assets. So the firm is worth $5,000 (it owes no debt)....
Assess why, under ideal condition the value of the firm is unaffected by the dividend policy...
Assess why, under ideal condition the value of the firm is unaffected by the dividend policy ?
Can the wrong dividend policy bankrupt a firm? Why or why not?
Can the wrong dividend policy bankrupt a firm? Why or why not?
What is the value of a dividend stock that pays a $3 dividend in yr 1,...
What is the value of a dividend stock that pays a $3 dividend in yr 1, a $3 dividend in yr 2, a $3.25 dividend in yr 3, then growing at 1% thereafter. TheWACC is 7% and the cost of equity is 9% A    47 b    35 c     49 d    37 2. I want to pull some cash out of my house by refinancing but I don’t want my pmt to increase. My initial mortgage was 200k and now the...
What is the value of a share of stock that paid a dividend of $( $...
What is the value of a share of stock that paid a dividend of $( $ 2.76 ) last year, and expected to grow at 15% for the next (3) years, then constant constant growth of 5% in perpetuity. For the required return, assume a risk free rate of 3%, a long-term market rate of return of 10% and a Beta of 1.04.
Stock price = $40, dividend paid =$2, EPS = $4, so : A. dividend payout ratio...
Stock price = $40, dividend paid =$2, EPS = $4, so : A. dividend payout ratio =5% b dividend yield =5% c. dividend yield =50% d. P-E=20 e None of the above
Does a company’s Dividend Policy matter? Explain how it is that dividends are so important but,...
Does a company’s Dividend Policy matter? Explain how it is that dividends are so important but, at the same time, dividend policy is irrelevant. Include in your discussion how stock repurchases are similar to dividends and why they have come under recent public scrutiny.
Calculate the present value of a stock if this stock is expectedto pay $1.75 dividend...
Calculate the present value of a stock if this stock is expected to pay $1.75 dividend in the next six years and then in year 7 and thereafter it pays $2 constant dividend forever. The interest rate is 8%. Please provide excel formula and step-by-step explanations on your calculation to get your final answer.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT