Reference no: EM131511635

DETERMINANTS OF DIVIDEND LAG

1. Which of the following types of firms is likely to wait least after earnings go up before increasing dividends?

a. A cyclical firm, whose earnings have surged because of an economic boom

b. A pharmaceutical firm whose earnings have increased steadily over the past five years, due to a successful new drug

c. A technology, whose latest product’s success has translated into a surge in earnings

Explain.

DIVIDEND POLICY AT GROWTH FIRMS

2. Assume that you are following a growth firm whose growth rate has begun easing. Which of the following would you most likely observe in terms of dividend policy at the firm?

a. An immediate increase of dividends to reflect the lower reinvestment needs

b. No change in dividend policy, and an increase in the cash balance

c. No change in dividend policy, and an increase in acquisitions of other firms

Explain.

DIVIDEND POLICIES AND STOCK BUYBACK RESTRICTIONS

3. Some countries do not allow firms to buy back stock from their stockholders. Which of the following would you expect of dividend policies in these countries (relative to countries that do not restrict stock buybacks)?

a. Higher portion of earnings will be paid out in dividends; more volatile dividends

b. Lower portion of earnings will be paid out in dividends; more volatile dividends

c. Higher portion of earnings will be paid out in dividends; less volatile dividends

d. Lower portion of earnings will be paid out in dividends; less volatile dividends

Explain.

DIVIDEND IRRELEVANCE

4. Based on the Miller–Modigliani assumptions, dividends are least likely to affect value for what types of firms?

a. Small companies with substantial investment needs

b. Large companies with significant insider holdings

c. Large companies with significant holdings by pension funds (which are tax-exempt) and minimal investment needs

Explain.