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Reading 30: Dividends and Dividend Policy LOS m~ Q1-4

 

LOS m: Differentiate among the schools of thought on dividends (dividend irrelevance, dividend preference, and tax aversion), and discuss their implications for shareholder value and the price-to-earnings ratio.

Q1. The bird-in-the-hand argument is based on the assumption that:

A)   investors value expected capital gains more highly than expected dividends because of the lower tax rate on capital gains.

B)   investors are indifferent between dividends and capital gains.

C)   investors view dividends as being less risky than expected capital gains.

 

Q2. According to Modigliani and Miller’s dividend irrelevancy theory, an investor in a firm that does not pay a dividend can still earn a “dividend” on that company by:

A)   selling a portion of the company's stock each year.

B)   contacting the firm and asking for a dividend payment.

C)   buying additional shares each year.

 

Q3. In a world with taxes and brokerage costs:

A)   Modigliani and Miller say that dividend policy is irrelevant.

B)   dividend policy may be relevant.

C)   Modigliani and Miller say that dividend policy is relevant.

 

Q4. If Modigliani and Miller’s dividend irrelevancy theory is correct, what is the impact on a firm’s cost of capital and share price if its dividend payout increases?

          Cost of Capital                        Share Price

 

A)  An increase                            A decrease

B)  None                                       A decrease

C)  None                                       None

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