Directions: describe how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. Each problem is worth five points apiece for a total of 25 points for this homework assignment.
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 not influence 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.