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Fin 534 Week 11 Final Exam Part 2 – New

  • Date Submitted: 10/18/2016 11:11 AM
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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 retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm’s stock.

If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget. Therefore, the better the firm’s investment opportunities, the lower its payout ratio should be.

Stock dividends and stock splits should, at least conceptually, have the same effect on shareholders’ wealth.

A reverse split reduces the number of shares outstanding.

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm’s required return constant, other things held constant.

If the information content, or signaling, hypothesis is correct, then changes in dividend policy can have an important effect on the firm’s value...


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