Chapter 13 Dividend Policy and Internal Financing

1) Dividends per share divided by earnings per share equal the dividend payout ratio.

2) A firm's dividend policy includes two basic components: the dividend payout ratio and dividend stability.

3) Corporations distribute cash back to their owners (stockholders) either as cash dividends or by repurchasing shares of stock in the open market.

4) Expected dividends and share repurchases are the cash flow that underlies stock valuation.

5) Share repurchases are not part of the stock valuation process because by definition the cash flow from a share repurchase ends the investment as the stock is no longer owned by the shareholder.

6) A firm's dividend policy includes two basic components: the dividend payout ratio and the profit retention ratio.

7) Memory, Inc. expects earnings per share this year to be $8. If earnings per share grow at an average annual rate of 6 percent and if Baker pays 60 percent of its earnings as dividends, what will the expected dividend per share be in 7 years?

Learning Objective 2

1) An investor who pays no tax would be more likely to accept the view that high dividends increase stock values rather than the view that low dividends increase stock values.

2) According to the clientele effect, dividend policy matters even if capital markets are perfect because investors self-select into dividend preference groups.

3) The information effect suggests dividend policy matters because dividends act as a persuasive communications tool, signaling investors about the financial condition of the firm.