Define each of the following terms: a. Optimal distribution policy b. Dividend irrelevance theory; bird-in-the-hand theory; tax effect theory c. Signaling hypothesis; clientele effect d. Residual distribution model; extra dividend e. Declaration date; holder-of-record date; ex-dividend date; payment date f. Dividend reinvestment plan (DRIP) g. Stock split; stock dividend; stock repurchase

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Answer 1

Textbook Question

Chapter 15, Problem 1Q

Define each of the following terms:

a. Optimal distribution policy
b. Dividend irrelevance theory; bird-in-the-hand theory; tax effect theory
c. Signaling hypothesis; clientele effect
d. Residual distribution model; extra dividend
e. Declaration date; holder-of-record date; ex-dividend date; payment date
f. Dividend reinvestment plan (DRIP)
g. Stock split; stock dividend; stock repurchase

a)

Expert Solution

Summary Introduction

To discuss: Meaning of optimal distribution policy.

Explanation of Solution

A corporate policy outlining how to communicate and distribute the messages throughout the various divisions and departments of the company, and it can also affect how documents are filed.

b)

Expert Solution

Summary Introduction

To discuss: Meaning of dividend irrelevance theory, tax effect theory and bird-in-the-hand theory.

Explanation of Solution

Dividend irrelevance theory: The dividend irrelevance theory holds that dividend policy has no effect on either the stock price of a company or its capital cost. Merton Miller and Franco Modigliani (MM) are the main proponents of this view.

In a theoretical sense, they prove their position, but only under strict assumptions, some of which in the real world are clearly not true.

Theory of “bird-in-the-hand”: The theory of “bird-in-the-hand” assumes that investors value a dividend dollar higher than a dollar of expected capital gains because the component of dividend yield, D₁/P₀ is less risky than the component of ‘g’ in the total expected return equation,

rS=D1P0+g

Tax effect theory: The tax effect theory proposes that investors prefer capital gains over dividends as capital gains taxes can be postponed into the future, while dividend taxes must be collected as dividends as earned.

c)

Expert Solution

Summary Introduction

To discuss: Meaning of signaling hypothesis and clientele effect.

Explanation of Solution

Information or signaling content, hypothesis: Is an indicator by the company through a price changes in the dividend that can provide insight as to what the anticipated earnings may be for the company making the actual announcement of the dividend.

Clientele effect: The effect information about dividend announcements on stockholders earning dividends.

d)

Expert Solution

Summary Introduction

To discuss: Residual distribution model and extra dividend.

Explanation of Solution

Residual distribution model: The residual dividend model implies the irrelevance of the theory of dividends, which claims that investors are indifferent between dividend returns or capital gains.

Extra dividend: Extra dividend paid on good times in addition to the regular dividend. It is not always possible to pay or sustain this dividend in the future.

e)

Expert Solution

Summary Introduction

To discuss: Declaration date, holder-of-record date, payment date and ex-dividend date.

Explanation of Solution

Declaration date: It is the date the directors met to declare the regular dividends.

Holder-of-record date: The date on which all registered owners of a company’s stock will receive dividends based on the number of shares held.

Ex-dividend date: It is the date when the right to the dividend leaves the stock.

Payment date: It is the date when the company actually mails the check to the record holders.

f)

Expert Solution

Summary Introduction

To discuss: Dividend re-investment plan (DRIP).

Explanation of Solution

An automated way for shareholders to voluntarily purchase common stock shares instead of having dividends paid out in cash.

g)

Expert Solution

Summary Introduction

To discuss: Stock split, stock dividend and stock repurchase.

Explanation of Solution

Stock split: If shares of a company’s stock are split, thereby increasing the number of outstanding shares on the market, a strategy for holding a stock in an optimal price range.

Stock dividend: Increases the number of outstanding shares as with a split stock, but as a stock dividend, stockholders will receive a proportionate share of stock at no expense.

Stock repurchase: It is nothing but when a company buys back some its own outstanding stock.

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Answer 2

Textbook Question

Chapter 15, Problem 1Q

Define each of the following terms:

a. Optimal distribution policy
b. Dividend irrelevance theory; bird-in-the-hand theory; tax effect theory
c. Signaling hypothesis; clientele effect
d. Residual distribution model; extra dividend
e. Declaration date; holder-of-record date; ex-dividend date; payment date
f. Dividend reinvestment plan (DRIP)
g. Stock split; stock dividend; stock repurchase

a)

Expert Solution

Summary Introduction

To discuss: Meaning of optimal distribution policy.

Explanation of Solution

A corporate policy outlining how to communicate and distribute the messages throughout the various divisions and departments of the company, and it can also affect how documents are filed.

b)

Expert Solution

Summary Introduction

To discuss: Meaning of dividend irrelevance theory, tax effect theory and bird-in-the-hand theory.

Explanation of Solution

Dividend irrelevance theory: The dividend irrelevance theory holds that dividend policy has no effect on either the stock price of a company or its capital cost. Merton Miller and Franco Modigliani (MM) are the main proponents of this view.

In a theoretical sense, they prove their position, but only under strict assumptions, some of which in the real world are clearly not true.

Theory of “bird-in-the-hand”: The theory of “bird-in-the-hand” assumes that investors value a dividend dollar higher than a dollar of expected capital gains because the component of dividend yield, D₁/P₀ is less risky than the component of ‘g’ in the total expected return equation,

rS=D1P0+g

Tax effect theory: The tax effect theory proposes that investors prefer capital gains over dividends as capital gains taxes can be postponed into the future, while dividend taxes must be collected as dividends as earned.

c)

Expert Solution

Summary Introduction

To discuss: Meaning of signaling hypothesis and clientele effect.

Explanation of Solution

Information or signaling content, hypothesis: Is an indicator by the company through a price changes in the dividend that can provide insight as to what the anticipated earnings may be for the company making the actual announcement of the dividend.

Clientele effect: The effect information about dividend announcements on stockholders earning dividends.

d)

Expert Solution

Summary Introduction

To discuss: Residual distribution model and extra dividend.

Explanation of Solution

Residual distribution model: The residual dividend model implies the irrelevance of the theory of dividends, which claims that investors are indifferent between dividend returns or capital gains.

Extra dividend: Extra dividend paid on good times in addition to the regular dividend. It is not always possible to pay or sustain this dividend in the future.

e)

Expert Solution

Summary Introduction

To discuss: Declaration date, holder-of-record date, payment date and ex-dividend date.

Explanation of Solution

Declaration date: It is the date the directors met to declare the regular dividends.

Holder-of-record date: The date on which all registered owners of a company’s stock will receive dividends based on the number of shares held.

Ex-dividend date: It is the date when the right to the dividend leaves the stock.

Payment date: It is the date when the company actually mails the check to the record holders.

f)

Expert Solution

Summary Introduction

To discuss: Dividend re-investment plan (DRIP).

Explanation of Solution

An automated way for shareholders to voluntarily purchase common stock shares instead of having dividends paid out in cash.

g)

Expert Solution

Summary Introduction

To discuss: Stock split, stock dividend and stock repurchase.

Explanation of Solution

Stock split: If shares of a company’s stock are split, thereby increasing the number of outstanding shares on the market, a strategy for holding a stock in an optimal price range.

Stock dividend: Increases the number of outstanding shares as with a split stock, but as a stock dividend, stockholders will receive a proportionate share of stock at no expense.

Stock repurchase: It is nothing but when a company buys back some its own outstanding stock.

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Answer 3

Textbook Question

Chapter 15, Problem 1Q

Define each of the following terms:

a. Optimal distribution policy
b. Dividend irrelevance theory; bird-in-the-hand theory; tax effect theory
c. Signaling hypothesis; clientele effect
d. Residual distribution model; extra dividend
e. Declaration date; holder-of-record date; ex-dividend date; payment date
f. Dividend reinvestment plan (DRIP)
g. Stock split; stock dividend; stock repurchase

a)

Expert Solution

Summary Introduction

To discuss: Meaning of optimal distribution policy.

Explanation of Solution

A corporate policy outlining how to communicate and distribute the messages throughout the various divisions and departments of the company, and it can also affect how documents are filed.

b)

Expert Solution

Summary Introduction

To discuss: Meaning of dividend irrelevance theory, tax effect theory and bird-in-the-hand theory.

Explanation of Solution

Dividend irrelevance theory: The dividend irrelevance theory holds that dividend policy has no effect on either the stock price of a company or its capital cost. Merton Miller and Franco Modigliani (MM) are the main proponents of this view.

In a theoretical sense, they prove their position, but only under strict assumptions, some of which in the real world are clearly not true.

Theory of “bird-in-the-hand”: The theory of “bird-in-the-hand” assumes that investors value a dividend dollar higher than a dollar of expected capital gains because the component of dividend yield, D₁/P₀ is less risky than the component of ‘g’ in the total expected return equation,

rS=D1P0+g

Tax effect theory: The tax effect theory proposes that investors prefer capital gains over dividends as capital gains taxes can be postponed into the future, while dividend taxes must be collected as dividends as earned.

c)

Expert Solution

Summary Introduction

To discuss: Meaning of signaling hypothesis and clientele effect.

Explanation of Solution

Information or signaling content, hypothesis: Is an indicator by the company through a price changes in the dividend that can provide insight as to what the anticipated earnings may be for the company making the actual announcement of the dividend.

Clientele effect: The effect information about dividend announcements on stockholders earning dividends.

d)

Expert Solution

Summary Introduction

To discuss: Residual distribution model and extra dividend.

Explanation of Solution

Residual distribution model: The residual dividend model implies the irrelevance of the theory of dividends, which claims that investors are indifferent between dividend returns or capital gains.

Extra dividend: Extra dividend paid on good times in addition to the regular dividend. It is not always possible to pay or sustain this dividend in the future.

e)

Expert Solution

Summary Introduction

To discuss: Declaration date, holder-of-record date, payment date and ex-dividend date.

Explanation of Solution

Declaration date: It is the date the directors met to declare the regular dividends.

Holder-of-record date: The date on which all registered owners of a company’s stock will receive dividends based on the number of shares held.

Ex-dividend date: It is the date when the right to the dividend leaves the stock.

Payment date: It is the date when the company actually mails the check to the record holders.

f)

Expert Solution

Summary Introduction

To discuss: Dividend re-investment plan (DRIP).

Explanation of Solution

An automated way for shareholders to voluntarily purchase common stock shares instead of having dividends paid out in cash.

g)

Expert Solution

Summary Introduction

To discuss: Stock split, stock dividend and stock repurchase.

Explanation of Solution

Stock split: If shares of a company’s stock are split, thereby increasing the number of outstanding shares on the market, a strategy for holding a stock in an optimal price range.

Stock dividend: Increases the number of outstanding shares as with a split stock, but as a stock dividend, stockholders will receive a proportionate share of stock at no expense.

Stock repurchase: It is nothing but when a company buys back some its own outstanding stock.

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Answer 4

Textbook Question

Chapter 15, Problem 1Q

Define each of the following terms:

a. Optimal distribution policy
b. Dividend irrelevance theory; bird-in-the-hand theory; tax effect theory
c. Signaling hypothesis; clientele effect
d. Residual distribution model; extra dividend
e. Declaration date; holder-of-record date; ex-dividend date; payment date
f. Dividend reinvestment plan (DRIP)
g. Stock split; stock dividend; stock repurchase

a)

Expert Solution

Summary Introduction

To discuss: Meaning of optimal distribution policy.

Explanation of Solution

A corporate policy outlining how to communicate and distribute the messages throughout the various divisions and departments of the company, and it can also affect how documents are filed.

b)

Expert Solution

Summary Introduction

To discuss: Meaning of dividend irrelevance theory, tax effect theory and bird-in-the-hand theory.

Explanation of Solution

Dividend irrelevance theory: The dividend irrelevance theory holds that dividend policy has no effect on either the stock price of a company or its capital cost. Merton Miller and Franco Modigliani (MM) are the main proponents of this view.

In a theoretical sense, they prove their position, but only under strict assumptions, some of which in the real world are clearly not true.

Theory of “bird-in-the-hand”: The theory of “bird-in-the-hand” assumes that investors value a dividend dollar higher than a dollar of expected capital gains because the component of dividend yield, D₁/P₀ is less risky than the component of ‘g’ in the total expected return equation,

rS=D1P0+g

Tax effect theory: The tax effect theory proposes that investors prefer capital gains over dividends as capital gains taxes can be postponed into the future, while dividend taxes must be collected as dividends as earned.

c)

Expert Solution

Summary Introduction

To discuss: Meaning of signaling hypothesis and clientele effect.

Explanation of Solution

Information or signaling content, hypothesis: Is an indicator by the company through a price changes in the dividend that can provide insight as to what the anticipated earnings may be for the company making the actual announcement of the dividend.

Clientele effect: The effect information about dividend announcements on stockholders earning dividends.

d)

Expert Solution

Summary Introduction

To discuss: Residual distribution model and extra dividend.

Explanation of Solution

Residual distribution model: The residual dividend model implies the irrelevance of the theory of dividends, which claims that investors are indifferent between dividend returns or capital gains.

Extra dividend: Extra dividend paid on good times in addition to the regular dividend. It is not always possible to pay or sustain this dividend in the future.

e)

Expert Solution

Summary Introduction

To discuss: Declaration date, holder-of-record date, payment date and ex-dividend date.

Explanation of Solution

Declaration date: It is the date the directors met to declare the regular dividends.

Holder-of-record date: The date on which all registered owners of a company’s stock will receive dividends based on the number of shares held.

Ex-dividend date: It is the date when the right to the dividend leaves the stock.

Payment date: It is the date when the company actually mails the check to the record holders.

f)

Expert Solution

Summary Introduction

To discuss: Dividend re-investment plan (DRIP).

Explanation of Solution

An automated way for shareholders to voluntarily purchase common stock shares instead of having dividends paid out in cash.

g)

Expert Solution

Summary Introduction

To discuss: Stock split, stock dividend and stock repurchase.

Explanation of Solution

Stock split: If shares of a company’s stock are split, thereby increasing the number of outstanding shares on the market, a strategy for holding a stock in an optimal price range.

Stock dividend: Increases the number of outstanding shares as with a split stock, but as a stock dividend, stockholders will receive a proportionate share of stock at no expense.

Stock repurchase: It is nothing but when a company buys back some its own outstanding stock.

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Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

a)

Expert Solution

Summary Introduction

To discuss: Meaning of optimal distribution policy.

Explanation of Solution

A corporate policy outlining how to communicate and distribute the messages throughout the various divisions and departments of the company, and it can also affect how documents are filed.

b)

Expert Solution

Summary Introduction

To discuss: Meaning of dividend irrelevance theory, tax effect theory and bird-in-the-hand theory.

Explanation of Solution

Dividend irrelevance theory: The dividend irrelevance theory holds that dividend policy has no effect on either the stock price of a company or its capital cost. Merton Miller and Franco Modigliani (MM) are the main proponents of this view.

In a theoretical sense, they prove their position, but only under strict assumptions, some of which in the real world are clearly not true.

Theory of “bird-in-the-hand”: The theory of “bird-in-the-hand” assumes that investors value a dividend dollar higher than a dollar of expected capital gains because the component of dividend yield, D₁/P₀ is less risky than the component of ‘g’ in the total expected return equation,

rS=D1P0+g

Tax effect theory: The tax effect theory proposes that investors prefer capital gains over dividends as capital gains taxes can be postponed into the future, while dividend taxes must be collected as dividends as earned.

c)

Expert Solution

Summary Introduction

To discuss: Meaning of signaling hypothesis and clientele effect.

Explanation of Solution

Information or signaling content, hypothesis: Is an indicator by the company through a price changes in the dividend that can provide insight as to what the anticipated earnings may be for the company making the actual announcement of the dividend.

Clientele effect: The effect information about dividend announcements on stockholders earning dividends.

d)

Expert Solution

Summary Introduction

To discuss: Residual distribution model and extra dividend.

Explanation of Solution

Residual distribution model: The residual dividend model implies the irrelevance of the theory of dividends, which claims that investors are indifferent between dividend returns or capital gains.

Extra dividend: Extra dividend paid on good times in addition to the regular dividend. It is not always possible to pay or sustain this dividend in the future.

e)

Expert Solution

Summary Introduction

To discuss: Declaration date, holder-of-record date, payment date and ex-dividend date.

Explanation of Solution

Declaration date: It is the date the directors met to declare the regular dividends.

Holder-of-record date: The date on which all registered owners of a company’s stock will receive dividends based on the number of shares held.

Ex-dividend date: It is the date when the right to the dividend leaves the stock.

Payment date: It is the date when the company actually mails the check to the record holders.

f)

Expert Solution

Summary Introduction

To discuss: Dividend re-investment plan (DRIP).

Explanation of Solution

An automated way for shareholders to voluntarily purchase common stock shares instead of having dividends paid out in cash.

g)

Expert Solution

Summary Introduction

To discuss: Stock split, stock dividend and stock repurchase.

Explanation of Solution

Stock split: If shares of a company’s stock are split, thereby increasing the number of outstanding shares on the market, a strategy for holding a stock in an optimal price range.

Stock dividend: Increases the number of outstanding shares as with a split stock, but as a stock dividend, stockholders will receive a proportionate share of stock at no expense.

Stock repurchase: It is nothing but when a company buys back some its own outstanding stock.

Answer 8

a)

Expert Solution

Summary Introduction

To discuss: Meaning of optimal distribution policy.

Explanation of Solution

A corporate policy outlining how to communicate and distribute the messages throughout the various divisions and departments of the company, and it can also affect how documents are filed.

Answer 9

a)

Expert Solution

Answer 10

a)

Expert Solution

Answer 11

Expert Solution

Answer 12

Summary Introduction

To discuss: Meaning of optimal distribution policy.

Answer 13

Explanation of Solution

A corporate policy outlining how to communicate and distribute the messages throughout the various divisions and departments of the company, and it can also affect how documents are filed.

Answer 14

b)

Expert Solution

Summary Introduction

To discuss: Meaning of dividend irrelevance theory, tax effect theory and bird-in-the-hand theory.

Explanation of Solution

Dividend irrelevance theory: The dividend irrelevance theory holds that dividend policy has no effect on either the stock price of a company or its capital cost. Merton Miller and Franco Modigliani (MM) are the main proponents of this view.

In a theoretical sense, they prove their position, but only under strict assumptions, some of which in the real world are clearly not true.

Theory of “bird-in-the-hand”: The theory of “bird-in-the-hand” assumes that investors value a dividend dollar higher than a dollar of expected capital gains because the component of dividend yield, D₁/P₀ is less risky than the component of ‘g’ in the total expected return equation,

rS=D1P0+g

Tax effect theory: The tax effect theory proposes that investors prefer capital gains over dividends as capital gains taxes can be postponed into the future, while dividend taxes must be collected as dividends as earned.

Answer 15

b)

Expert Solution

Answer 16

b)

Expert Solution

Answer 17

Expert Solution

Answer 18

Summary Introduction

To discuss: Meaning of dividend irrelevance theory, tax effect theory and bird-in-the-hand theory.

Answer 19

Explanation of Solution

Dividend irrelevance theory: The dividend irrelevance theory holds that dividend policy has no effect on either the stock price of a company or its capital cost. Merton Miller and Franco Modigliani (MM) are the main proponents of this view.

In a theoretical sense, they prove their position, but only under strict assumptions, some of which in the real world are clearly not true.

Theory of “bird-in-the-hand”: The theory of “bird-in-the-hand” assumes that investors value a dividend dollar higher than a dollar of expected capital gains because the component of dividend yield, D₁/P₀ is less risky than the component of ‘g’ in the total expected return equation,

rS=D1P0+g

Tax effect theory: The tax effect theory proposes that investors prefer capital gains over dividends as capital gains taxes can be postponed into the future, while dividend taxes must be collected as dividends as earned.

Answer 20

c)

Expert Solution

Summary Introduction

To discuss: Meaning of signaling hypothesis and clientele effect.

Explanation of Solution

Information or signaling content, hypothesis: Is an indicator by the company through a price changes in the dividend that can provide insight as to what the anticipated earnings may be for the company making the actual announcement of the dividend.

Clientele effect: The effect information about dividend announcements on stockholders earning dividends.

Answer 21

c)

Expert Solution

Answer 22

c)

Expert Solution

Answer 23

Expert Solution

Answer 24

Summary Introduction

To discuss: Meaning of signaling hypothesis and clientele effect.

Answer 25

Explanation of Solution

Information or signaling content, hypothesis: Is an indicator by the company through a price changes in the dividend that can provide insight as to what the anticipated earnings may be for the company making the actual announcement of the dividend.

Clientele effect: The effect information about dividend announcements on stockholders earning dividends.

Answer 26

d)

Expert Solution

Summary Introduction

To discuss: Residual distribution model and extra dividend.

Explanation of Solution

Residual distribution model: The residual dividend model implies the irrelevance of the theory of dividends, which claims that investors are indifferent between dividend returns or capital gains.

Extra dividend: Extra dividend paid on good times in addition to the regular dividend. It is not always possible to pay or sustain this dividend in the future.

Answer 27

d)

Expert Solution

Answer 28

d)

Expert Solution

Answer 29

Expert Solution

Answer 30

Summary Introduction

To discuss: Residual distribution model and extra dividend.

Answer 31

Explanation of Solution

Residual distribution model: The residual dividend model implies the irrelevance of the theory of dividends, which claims that investors are indifferent between dividend returns or capital gains.

Extra dividend: Extra dividend paid on good times in addition to the regular dividend. It is not always possible to pay or sustain this dividend in the future.

Answer 32

e)

Expert Solution

Summary Introduction

To discuss: Declaration date, holder-of-record date, payment date and ex-dividend date.

Explanation of Solution

Declaration date: It is the date the directors met to declare the regular dividends.

Holder-of-record date: The date on which all registered owners of a company’s stock will receive dividends based on the number of shares held.

Ex-dividend date: It is the date when the right to the dividend leaves the stock.

Payment date: It is the date when the company actually mails the check to the record holders.

Answer 33

e)

Expert Solution

Answer 34

e)

Expert Solution

Answer 35

Expert Solution

Answer 36

Summary Introduction

To discuss: Declaration date, holder-of-record date, payment date and ex-dividend date.

Answer 37

Explanation of Solution

Declaration date: It is the date the directors met to declare the regular dividends.

Holder-of-record date: The date on which all registered owners of a company’s stock will receive dividends based on the number of shares held.

Ex-dividend date: It is the date when the right to the dividend leaves the stock.

Payment date: It is the date when the company actually mails the check to the record holders.

Answer 38

f)

Expert Solution

Summary Introduction

To discuss: Dividend re-investment plan (DRIP).

Explanation of Solution

An automated way for shareholders to voluntarily purchase common stock shares instead of having dividends paid out in cash.

Answer 39

f)

Expert Solution

Answer 40

f)

Expert Solution

Answer 41

Expert Solution

Answer 42

Summary Introduction

To discuss: Dividend re-investment plan (DRIP).

Answer 43

Explanation of Solution

An automated way for shareholders to voluntarily purchase common stock shares instead of having dividends paid out in cash.

Answer 44

g)

Expert Solution

Summary Introduction

To discuss: Stock split, stock dividend and stock repurchase.

Explanation of Solution

Stock split: If shares of a company’s stock are split, thereby increasing the number of outstanding shares on the market, a strategy for holding a stock in an optimal price range.

Stock dividend: Increases the number of outstanding shares as with a split stock, but as a stock dividend, stockholders will receive a proportionate share of stock at no expense.

Stock repurchase: It is nothing but when a company buys back some its own outstanding stock.

Answer 45

g)

Expert Solution

Answer 46

g)

Expert Solution

Answer 47

Expert Solution

Answer 48

Summary Introduction

To discuss: Stock split, stock dividend and stock repurchase.

Answer 49

Explanation of Solution

Stock split: If shares of a company’s stock are split, thereby increasing the number of outstanding shares on the market, a strategy for holding a stock in an optimal price range.

Stock dividend: Increases the number of outstanding shares as with a split stock, but as a stock dividend, stockholders will receive a proportionate share of stock at no expense.

Stock repurchase: It is nothing but when a company buys back some its own outstanding stock.