Fin.534 Chapter 14 Homework

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 c. investors view dividends as being less risky than potential future capital gains. Section 14-3c of our book points out that future gains can be “taxes more favorably than dividend income” 2. Which of the following should not influence a firm's dividend policy decision? c. The fact that much of the firm's equipment has been leased rather than bought and owned. Answer C here is the only answer that does not talk about shareholders or taxes that related to dividends. Answer c does not influence the dividend policy decision. 3.Which of the following statements about dividend policies is correct? d. The clientele effect suggests that companies should follow a stable dividend policy. Section 14.6 talks about the Clientele Effect and putting into place a stable payout type of schedule for the company to use. This would be in the company’s best interest towards dividend policies. 4. Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio? b. Its R&D efforts pay off, and it now has more high-return investment opportunities. The rest of the answers seem to increase a firms dividend payout. After reading Chapter 14, I feel that a decrease in the firm’s dividend payout would br due to managers seeking a high-return investments opportunities. 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? e. The firm's net income increases. As the firm’s net income increases, this would lead to an increase in the firm’s dividend per share output.