FM-Topic 8 Dividend Policy

Retained earnings (RE) are

• an indication of a company's liquidity.

• the same as cash in the bank.

• not important when determining dividends.

• the cumulative earnings of the company after dividends.

The dividend-payout ratio is equal to

• the dividend yield plus the capital gains yield.

• total dividends divided by net profit.

• Current share price divided by annual dividends per share.

• total dividends divided by total ordinary shares issued.

Which of the following examples best represents a passive residual dividend policy?

• The firm sets a policy such that the proportion of dividends paid from net profit remains constant.

• The firm pays dividends with what remains of net profit after taking acceptable investment projects.

• The firm sets a policy such that the quantity (dollar amount per share) of dividends paid from net profit remains constant.

• All of the above are examples of various types of passive residual dividend policies.

Modigliani and Miller (MM) argue that the dividend decision

• is irrelevant as the value of the firm is based on the earning power of its assets.

• is relevant as the value of the firm is not based just on the earning power of its assets.

• is irrelevant as dividends represent cash leaving the firm to shareholders, who own the firm anyway.

• is relevant as cash outflow always influences other firm decisions

Financial signaling has been raised as an argument in the battle over the relevancy of dividends. Which of the following statements concerning dividends is most likely to be voiced by someone using the financial signaling argument?

• A dividend decrease should be viewed by investors as "good news." The dividend decrease acts to add persuasion to the statement that the firm has better uses for the earnings of the company than the stockholders.

• Reported accounting earnings of a company, not dividends, are a proper reflection or signal of the company's economic earnings.

• The price of a firm's stock should react unfavorably to an increase in dividends.

• Cash dividends speak louder than words when it comes to conveying information about management's expectations of the future.

Firm Pickemon, Inc. has had earnings of RM3.20, RM3.00, and RM5.50 per share for the past three years. The firm anticipates maintaining the same dividend policy this year as the past three years. That dividend policy has resulted in dividends per share of RM1.28, RM1.20, and RM2.20 for the past three years. It is anticipated that the next year will result in a large increase in earnings to RM9.80 per share. What dividend do you expect the firm to pay in the next year?

• RM3.92

• RM1.56

• RM3.12

• RM4.68

A(n) __________ occurs when there is an increase in the number of shares outstanding by reducing the par value of stock.

• stock split

• stock dividend

• regular dividend

• extra dividend

A dividend reinvestment scheme (DRS) is __________.

• an optional plan, provided by brokerage firms, allowing shareholders to automatically reinvest dividend payments in additional shares of the firm's stock.

• an optional plan, provided by large corporate firms, allowing shareholders to automatically reinvest dividend payments in additional shares of the firm's stock.

• a mandatory plan, provided by brokerage firms, where shareholders are automatically reinvesting dividend payments in additional shares of the firm's stock at a reduced price.

• a mandatory plan, provided by large corporate firms, where shareholders are automatically reinvesting dividend payments in additional shares of the firm's stock at a reduced price.

One of the condition stated in the loan contract is the firm can pay dividends when it has fully settled the loan principal. This example BEST describes the _______ of dividend policy.

• legal constraints

• inflation

• Liquidity and cash flow considerations