A firm with lower / greater floatation costs more likely

Question : A firm with lower / greater floatation costs more likely

A firm with lower / greater floatation costs is more likely to have a high dividend payout ratio.

Consider the following restriction: Limits set by the IRS on the amount of earnings a firm can retain for reasons that help individuals gain special benefits.

Based on your understanding of the constraints on dividend payments, identify the type of constraint this condition represents. Assume that all other factors are held constant:

Penalty tax

Option contract

Impairment of capital rule

Bond indentures

Consider the case of purple sage producers Inc. and answer the question that follows:

Purple sage producers Inc. is an oil drilling company and has some free cash flow that is not expected to be used to finance future growth or potential investment projects. The company plans to distribute its free cash flow to its shareholders but is still deciding whether the distribution should take the form of a stock repurchase or the payment of a cash dividend.

Which of the following is a characteristic of a firm’s optimal distribution policy?

It maximizes the firm’s return on equity.

It maximizes the firm’s earnings per share.

It maximizes the firm’s intrinsic value.

It maximizes the firm’s total assets.

When investors receive dividends today, they may choose to reinvest or to consume goods. In such a case will the investors will likely prefer:

More Dividends

Fewer Dividends

One of the factors that suggest that firms should pursue high / low payouts is: Dividends received far into the future are significantly more uncertain than dividends received in the near future.

Based on the factor described, identify whether investors, in general, will tend to favour:

A high payout

A low payout

Based on the factor given, identify whether firms, in general, will tend to favor high or low payout ratios. Favor a low payout Favor a high payout Erin and Mia are finance researchers and are discussing the Modigliani and Miller (MM) dividend irrelevance theory. Based on your understanding of MM's argument and the impact of the assumptions applied to the argument, fill in the missing parts of their conversation.

Erin: Modigliani and Miller (MM) dividend irrelevance theory is based on several assumptions. However, in the real world, these assumptions don't apply.

Mia: True. If the transaction cost assumption is removed, then investors do care about how they receive their gains from their investment capital gains or dividends.

Erin: You are right, Mia. According to MM's theory, investors who own low- or nondividend-paying stocks could ________ their holdings to satisfy current income requirements.

Mia: But in the real world, Erin, this is not a fair assumption. Transaction costs with each trade activity will _________ the investor's earnings leading investors toward preferring regular dividends.


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