Question

14. What type of entity is most likely to offer a DRIP: a. The US government b. A Silicon Valley start-up with a big idea c. An oil exploration and production company d. A mature company that sells toilet paper e. A mature company that sells construction equipment 15.This question technically relates to Chapter 14, but we also discussed this in lecture. Which of the following statements about dividend policy is (are) most likely TRUE: I. Tax rates are the primary determinate of dividend policy Il Increases in dividends tend to lag increases in earnings per share Management is usually reluctant to decrease dividend payments unless absolutely necessary a. I C. e. II,111

Answer 1

14. B Silicon startup with a big idea.

DRIP or Dividend Re-investment Plan, is a way that shareholders can use their dividend to re-invest in the company by purchasing shares from the company. These shares are usually sold at discounted prices, and through the company directly there is no stock exchange involved. A start-up would likely use this idea for 2 reasons. One because DRIP is an effective low-cost way of acquiring additional capital. Since stock repurchase/sales done through the stock exchange give no benefit to the corporation, DRIP provides the benefits directly to the company. Secondly, DRIP helps in acquiring a long-term investor, since the shares are usually bought in parts through the DRIP ( example 1$ dividend could buy 1/4th of the share). DRIP helps retain customers longer in the corporation because its sale is also a long and tedious process since the shares can only be sold back to the corporation and not any other third party.

15. I and III

(I) because the dividends are given out through the net earnings of the period. Net earnings are calculated after deducting the tax from the total earnings, therefore the tax rate determines the amount of net income from which the dividend policy and amount can be decided.

(III) A reduction in dividends could be many things to the shareholders - reduced profits, reduced liquidity, bad performance of the company. If the company has expansion or investment plans for which the reserves are needed, the investors have to be well informed in advance so they are on par with the company's vision. Companies refrain from reducing dividends unless necessary since it sends out a bad image in the market and could lead to unhealthy speculation.