Which of the following would be most likely to lead to a decrease in a firm’s dividend payout ratio?
Its earnings become more stable.
Its access to the capital markets increases.
Its R&D efforts pay off, and it now has more high-return investment opportunities.
Its accounts receivable decrease due to a change in its credit policy.
Its stock price has increased over the last year by a greater percentage than the increase in the broad stock market averages.
In the real world, dividends
are usually more stable than earnings.
fluctuate more widely than earnings.
tend to be a lower percentage of earnings for mature firms.
are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings increased or decreased.
are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if EPS = $2.00, then DPS will equal $0.80. Once the percentage is set, then dividend policy is on “automatic pilot” and the actual dividend depends strictly on earnings.
Which of the following statements is correct?
One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.
If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not
follow the strict residual dividend policy.
If a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever the firm’s investment opportunities improve.
If Congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios.
Despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees.
Which of the following would increase the likelihood that a company would increase its debt ratio, other things held constant?
An increase in costs incurred when filing for bankruptcy.
An increase in the corporate tax rate.
An increase in the personal tax rate.
The Federal Reserve tightens interest rates in an effort to fight inflation.
The company's stock price hits a new low.
Reynolds Resorts is currently 100% equity financed. The CFO is considering a recapitalization plan under which the firm would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock
. The recapitalization would not change the company’s total assets, nor would it affect the firm’s basic earning power, which is currently 15%. The CFO believes that this recapitalization would reduce the WACC and increase stock price. Which of the following would also be likely to occur if the company goes ahead with the recapitalization plan?
The company’s net income would increase.
The company’s earnings per share would decline.
The company’s cost of equity would increase.
The company’s ROA would increase.
The company’s ROE would decline.
An increase in the debt ratio will generally have no effect on which of these items?
The firm's beta.