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Fundamentals of Corporate Finance

Stephen A. Ross; Randolph W. Westerfield; Bradford D. Jordan

Chapter 17

DIVIDENDS AND PAYOUT POLICY - all with Video Answers

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Chapter Questions

00:49

Problem 1

How is it possible that dividends are so important, but at the same time, dividend policy is irrelevant?

Zach Steedman
Zach Steedman
Numerade Educator
12:18

Problem 2

What is the impact of a stock repurchase on a company's debt ratio? Does this suggest another use for excess cash?

Puneet Prajapati
Puneet Prajapati
Numerade Educator
01:51

Problem 3

On Tuesday, December 5, Hometown Power Co.'s board of directors declares a dividend of 75 cents per share payable on Wednesday, January 17 , to shareholders of record as of Wednesday, January 3. When is the ex-dividend date? If a shareholder buys stock before that date, who gets the dividends on those shares, the buyer or the seller?

Narayan Hari
Narayan Hari
Numerade Educator
01:13

Problem 4

Some corporations, like one British company that offers its large shareholders free crematorium use, pay dividends in kind (that is, offer their services to shareholders at below-market cost). Should mutual funds invest in stocks that pay these dividends in kind? (The fundholders do not receive these services.)

Achintya Suden
Achintya Suden
Numerade Educator

Problem 5

If increases in dividends tend to be followed by (immediate) increases in share prices, how can it be said that dividend policy is irrelevant?

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Problem 6

Last month, Central Virginia Power Company, which had been having trouble with cost overruns on a nuclear power plant that it had been building, announced that it was "temporarily suspending payments due to the cash flow crunch associated with its investment program." The company's stock price dropped from $$\$ 28.50$$ to $$\$ 25$$ when this announcement was made. How would you interpret this change in the stock price (that is, what would you say caused it)?

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01:13

Problem 7

The DRK Corporation has recently developed a dividend reinvestment plan, or DRIP. The plan allows investors to reinvest cash dividends automatically in DRK in exchange for new shares of stock. Over time, investors in DRK will be able to build their holdings by reinvesting dividends to purchase additional shares of the company. A large number of companies offer dividend reinvestment plans. Most companies with DRIPs charge no brokerage or service fees. In fact, the shares of DRK will be purchased at a 10 percent discount from the market price. A consultant for DRK estimates that about 75 percent of DRK's shareholders will take part in this plan. This is somewhat higher than the average. Evaluate DRK's dividend reinvestment plan. Will it increase shareholder wealth Discuss the advantages and disadvantages involved here.

Achintya Suden
Achintya Suden
Numerade Educator

Problem 8

For initial public offerings of common stock, 2013 was an average year, with about $\$ 38.75$ billion raised by the process. Relatively few of the 157 firms involved paid cash dividends. Why do you think that most chose not to pay cash dividends?

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Problem 9

How do you think this tax law change affected ex-dividend stock prices?

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Problem 10

How do you think this tax law change affected the relative attractiveness of stock repurchases compared to dividend payments?

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