Fin 534 Week 11 Final Exam Part 2 – New Essay

3371 Words Jan 20th, 2016 14 Pages
FIN 534 Week 11 Final Exam Part 2 – NEW

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FIN 534 Week 11 Final Exam Part 2 – NEW

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm’s stock price. The dividend irrelevance theory, proposed by Miller and Modigliani, says that provided a firm pays at least some dividends, how much it pays does not affect either its cost of capital or its stock price. MM’s dividend irrelevance theory says that while dividend policy does not affect a firm’s value, it can affect the cost of capital. If investors prefer firms that
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If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual distribution policy. If the shape of the curve depicting a firm’s WACC versus its debt ratio is more like a sharp “V”, as opposed to a shallow “U”, it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year. Even if a stock split has no information content, and even if the dividend per share adjusted for the split is not increased, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small. MULTIPLE CHOICE In the real world, dividends
a. are usually more stable than earnings.
b. fluctuate more widely than earnings.
c. tend to be a lower percentage of earnings for mature firms.
d. are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings increased or decreased.
e. are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if EPS = $2.00, then DPS will equal $0.80. Once the percentage is set, then dividend policy is on “automatic pilot” and the actual dividend depends strictly on earnings. Poff Industries’ stock currently sells for $120 a share. You own 100 shares of the stock. The company is contemplating a 2-for-1 stock split.

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