Strayer FIN534 Week 8 Homework Assignment Chapter 14

FIN 534 Week 8 Homework Assignment
Chapter 14
1. Myron Gordon and John
Lintner believe that the required return on equity increases as the dividend
payout ratio is decreased. Their argument is based on the assumption that
a. investors require that the
dividend yield and capital gains yield equal a constant.
b. capital gains are taxed at a
higher rate than dividends.
c. investors view dividends as
being less risky than potential future capital gains.
d. investors value a dollar of
expected capital gains more highly than a dollar of expected dividends because
of the lower tax rate on capital gains.
e. investors are indifferent
between dividends and capital gains.
2. Which of the following should notinfluence a firm’s dividend
policy decision?
a. A strong preference by most
shareholders for current cash income versus capital gains.
b. Constraints imposed by the
firm’s bond indenture.
c. The fact that much of the
firm’s equipment has been leased rather than bought and owned.
d. The fact that Congress is
considering changes in the tax law regarding the taxation of dividends versus
capital gains.
e. The firm’s ability to
accelerate or delay investment projects.
3. Which of the following statements about
dividend policies is correct?
a. One reason that companies tend
to avoid stock repurchases is that dividend payments are taxed at a lower rate
than gains on stock repurchases.
b. One advantage of dividend
reinvestment plans is that they allow shareholders to avoid paying taxes on the
dividends that they choose to reinvest.
c. One key advantage of a
residual dividend policy is that it enables a company to follow a stable
dividend policy.
d. The clientele effect suggests
that companies should follow a stable dividend policy.
e. Modigliani and Miller argue
that investors prefer dividends to capital gains because dividends are more
certain than capital gains. They call this the “bird-in-the hand” effect.
4. Which of the following would
be most likely to lead to a decrease in a firm’s dividend payout ratio?
a. Its access to the capital
markets increases.
b. Its R&D efforts pay off,
and it now has more high-return investment opportunities.
c. Its accounts receivable
decrease due to a change in its credit policy.
d. Its stock price has increased
over the last year by a greater percentage than the increase in the broad stock
market averages.
e. Its earnings become more
stable.
5. Reynolds Paper Products
Corporation follows a strict residual dividend policy. All else equal, which of
the following factors would be most likely to lead to an increase in the firm’s
dividend per share?
a. The company increases the
percentage of equity in its target capital structure.
b. The number of profitable
potential projects increases.
c. Congress lowers the tax rate
on capital gains. The remainder of the tax code is not changed.
d. Earnings are unchanged, but
the firm issues new shares of common stock.
e. The firm’s net income
increases.