Question Details

If a firm adheres strictly to the residual dividend policy, the issuance of new common stock 



 .	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- dividend per share?

a. The company increases the percentage of equity in its target capital structure.
b. The number of profitable potential projects increases.
c. Congress lowers the tax rate on capital gains.  The remainder of the tax code is not changed.
d. Earnings are unchanged, but the firm issues new shares of common stock.
e. The firm- net income increases.

	
 .	If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay

a.	no dividends to common stockholders.
b.	dividends only out of funds raised by the sale of new common stock.
c.	dividends only out of funds raised by borrowing money (i.e., issue debt).
d.	dividends only out of funds raised by selling off fixed assets.
e.	no dividends except out of past retained earnings.

	
 .	If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that

a.	the dividend payout ratio is increasing.
b.	no dividends were paid during the year.
c.	the dividend payout ratio is decreasing.
d.	the dollar amount of investments has decreased.
e.	the dividend payout ratio has remained constant.

	
 .	Which of the following statements is CORRECT?

a.	One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account.
b.	Stock repurchases can be used by a firm that wants to increase its debt ratio.
c.	Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities.
d.	One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding.
e.	One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their ownership in the company.

	
 .	Which of the following statements is CORRECT?
	
a.	One nice feature of dividend reinvestment plans (DRIPs) is that they reduce the taxes investors would have to pay if they received cash dividends.
b.	Empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend, and as a result share prices fall when dividend increases are announced.  The reason is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities.
c.	If a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense.  However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.
d.	Dividend reinvestment plans have not caught on in most industries, and today about 99% of all companies with DRIPs are utilities.
e.	Under the tax laws as they existed in 2008, a dollar received for repurchased stock must be taxed at the same rate as a dollar received as dividends.





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