What is the primary difference in how Miller-Modigliani (MM) and Gordon-Lintner (GL) view the riskiness of a firm's cash flows to investors?
Explanation
The core of the disagreement between Miller-Modigliani and Gordon-Lintner revolves around risk perception. Gordon-Lintner argued that investors see dividends as safer and more certain than future capital gains. Miller-Modigliani countered that the true risk lies in the firm's business operations and that dividend policy is merely a financing decision that doesn't alter this underlying risk.
Other questions
What is the central argument of the dividend irrelevance theory, as advanced by Miller and Modigliani (MM)?
According to the bird-in-the-hand fallacy, as described by MM, what is the argument for why investors might prefer dividends to capital gains?
What is the primary implication of the information content, or signaling, hypothesis of dividend policy?
A company has a net income of $100 million, a target equity ratio of 60 percent, and it plans to spend $50 million on capital projects. If the company follows a strict residual dividend model, how much money will be paid out as dividends?
A company has an all-common-equity capital structure and has 200,000 shares of stock outstanding. Its projected net income for 2019 is $2,000,000. The company identifies $800,000 of acceptable investment projects for 2019. If this company uses the residual dividend model, what will its dividend per share (DPS) be for 2019?
What is the primary characteristic of a low-regular-dividend-plus-extras dividend policy?
What is the primary purpose of a stock split?
What is a stock dividend?
American Development Corporation (ADC) expects to earn $4.4 million, has 1.1 million shares outstanding, and its stock trades at $20 per share. If ADC uses $2.2 million to repurchase 110,000 of its shares, what will the new earnings per share (EPS) be?
What is the clientele effect theory of dividend policy?
A firm follows a strict residual dividend policy. If its investment opportunities improve, meaning its optimal capital budget increases, what will likely happen to its dividend payout ratio, holding all else constant?
What is a primary tax advantage for an individual investor to receive capital gains from a stock repurchase instead of a cash dividend?
Which of the following is considered an advantage of stock repurchases from the firm's perspective?
Suppose you own 100 shares of a company's stock. The EPS is $4.00, the DPS is $2.00, and the stock sells for $60 per share. If the company announces a two-for-one split, what would you expect the adjusted EPS and DPS to be immediately after the split?
The date on which a company closes its stock transfer books and makes up a list of shareholders to receive a dividend is called the:
A firm has a capital budget of $30 million, net income of $35 million, and a target capital structure of 55 percent equity. If the firm follows a strict residual dividend policy, what is its dividend payout ratio?
What is the primary motivation for a firm to establish a Dividend Reinvestment Plan (DRIP)?
Which of the following best describes the catering theory of dividends?
Gamma Industries has a net income of $3,800,000 and 1,490,000 shares of common stock outstanding. The stock trades at $67 per share. If Gamma uses available cash to repurchase 10 percent of its shares at the current market price, and the P/E ratio remains unchanged, what will be the stock price following the repurchase?
If a stock's price is $30.50 on December 3rd, and the company has an ex-dividend date of December 4th for a $0.50 dividend, what would be the expected opening price on December 4th, barring other market fluctuations?
What is the primary constraint imposed by the impairment of capital rule on dividend payments?
A stock trades for $145 a share. The company is considering a 3-for-2 stock split. Assuming the split has no effect on the total market value of its equity, what will be the company's approximate stock price following the split?
What is the primary difference between how a stock repurchase and a cash dividend affect a company's balance sheet?
According to the residual dividend model, what is the first step a firm takes when determining its dividend policy?
Stock that has been repurchased by a firm is referred to as:
Altamonte Telecommunications has a target capital structure of 45 percent debt and 55 percent equity. The company's capital budget for the upcoming year is $1,000,000. If the company reports a net income of $1,200,000 and follows a residual dividend policy, what will be its dividend payout ratio?
After a 5-for-1 stock split, Tyler Company paid a dividend of $1.15 per new share. This represented a 7 percent increase over last year's pre-split dividend. What was last year's dividend per share?
Which of the following is NOT one of the three principal types of stock repurchases mentioned in the text?
Why might a company with a very large number of profitable investment opportunities choose to have a low dividend payout ratio?
If a company has a stated dividend policy of paying out 55 percent of its net income and wants to expand its capacity with a $20 million investment, what else must be known to determine the amount of external equity it must seek?
When a firm's stock price rises significantly, making it trade outside the commonly perceived optimal price range of $20 to $80, what action is the firm most likely to take?
What is a major reason that companies have become less likely to pay dividends over the past few decades, according to the Fama and French study?
Which of these industries would most likely have a high dividend payout ratio?
Which factor is generally considered more critical for a company's ability to maintain a stable dividend?
If a firm uses a stock repurchase to distribute cash to shareholders, which of the following is true?
A firm has a policy of distributing 55 percent of its net income. In 2018, its net income was $5 million. It wants to fund a $20 million expansion. Assuming it maintains a target debt level of 35 percent in its capital structure, how much external equity must it seek?
Which of the following is NOT a constraint on dividend policy discussed in the text?
A firm has a policy to maintain a constant dividend payout ratio of 25 percent. Last year, net income was $1.35 million. This year, net income is expected to be $1.638 million. The number of shares is constant at 320,000. What will be the company's dividend per share this year?
Why might a firm with temporary excess cash flows prefer a stock repurchase over increasing its cash dividend?
What is the primary role of cash flows in determining a company's ability to pay dividends, as illustrated by the Exxon Mobil example?
What is a key similarity between a stock split and a stock dividend?
What does the optimal dividend policy aim to strike a balance between?
A firm's stock currently sells for $12.50 per share. The firm is expecting to pay an annual dividend of $0.75 per share out of earnings of $2.25 per share. Its ROE has been 18 percent. What is the firm's expected long-run growth rate?
What is a primary disadvantage of stock repurchases compared to cash dividends from an investor's perspective?
A company follows a pure residual dividend policy and has a target capital structure of 40 percent debt and 60 percent equity. Its net income is $7,500,000. If its capital budget is $8,000,000, what will be its dividend payout ratio?
How do financial managers typically use the residual dividend model in practice?
Which of the following is a disadvantage of stock repurchases for the firm?
Keenan Company paid dividends totaling $3,600,000 in 2017 on net income of $10.8 million. In 2018, the company expects earnings of $14.4 million and has profitable investment opportunities of $8.4 million. Its target capital structure is 60 percent equity. If the company continues its 2017 dividend payout ratio, what will be the total dividend payment for 2018?
What is the primary reason the actual stock price drops by less than the dividend amount on the ex-dividend date?