1. Explain the role of cash and of earnings when a corporation is deciding how much, if any, cash dividends to pay to common stockholders. In the long-run earnings are necessary to maintain dividend payments, but at the time an actual dividend payment is made, adequate cash is necessary. 2. Are there any legal factors that could restrict a corporation in its attempt to pay cash dividends to common stockholders? Explain. A firm may be legally restricted as to the dividends it can pay by existing bond indentures or loan agreements. It may also be restricted as to the payment of common stock dividends is scheduled preferred stock dividends have not been paid. 3. What are some of the factors that common stockholders consider when deciding how much, if any, cash dividends they desire from the corporation in which they have invested? Common stockholders would consider the company’s investment opportunity, their need for income, and their tax bracket when deciding on their desire for dividends. 4. What is the Modigliani and Miller theory of dividends? Explain. The Modigliani-Miller theory of dividends says that dividend theory is irrelevant. They claim that it is the income produced by assets that is important, not how funds are distributed. 5. Do you believe an increased common stock cash dividend can send a signal to the common stockholders? If so, what signal might it send? An increase in cash dividends is often seen as a positive signal. A company would be unlikely to increase its dividend if it did not believe its future prospects were good enough to sustain the higher level of dividends. This is because the market usually frowns upon a cut in dividends. 6. Explain the bird in the hand theory of cash dividends. The bird in the hand dividends theory says that dividends received now are better than a promise of future dividends. Uncertainty is resolved when a dividend is paid. 7. What is the effect of stock (not cash) dividends and stock splits on the market price of common stock? Why do corporations declare stock splits and stock dividends? Stock splits and stock dividends decrease the price per share of the common stock but should not increase the total market value of all common stock outstanding unless other positive things are perceived to occur. Many companies believe that a stock split or stock dividend makes their stock more affordable and therefore more attractive to a wider range of potential investors.
Posted on: Mon, 08 Jul 2013 16:25:16 +0000
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