Practice Problems
Prof. P.V. Viswanath

Dividend Policy

Short Questions:

1. Briefly explain how dividends can be signals

2. "Dividends represent cash in hand.  Obviously higher dividends are always better."  Is this statement necessarily true?

3. What factors should be taken into account in determining a firm's payout policy?

4. If a firm earns a rate of return on equity that is equal to its cost of equity, should it retain earnings or pay them out?  Why or why not?

5. Firms with low leverage often have low payout ratios as well.  Is this a coincidence?  Explain.

6. What is better -- paying dividends or buying back shares?

7. What correlation would you expect to find between firms' payout ratios and their betas?  Explain.

8. Would you expect established firms to have high or low payout ratios?  Explain.

9. Just as issuing equity dilutes earnings, buying back stock is good because it increases earnings per share.  Comment.  (Look at Issuing equity dilutes earnings.)

Definitions:

1. Cash Dividend

2. Extra Cash Dividend

3. Stock Dividend

4. Liquidating Dividends

5. Stock Split

6. Ex-dividend date

7. Cum-dividend price

8. Dividend Yield

9. Dividend Payout ratio

10. Dividend Irrelevance

11. Dividend arbitrage

12. Dividend capture

Problem 1.

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