Question

Question 3

1. Explain the concept of dividend policy with an example.
2. Discuss the dividend irrelevance theory with underlying assumptions by Modigliani and Miller.
3. Your parents prefer high dividend paying stocks, while you prefer no-dividend stocks – explain the possible reasons for the differences in choice.
4. Explain the following concepts with an example;
   1. Signaling hypothesis
   2. Clientele effects
   3. Catering theory

5. You are the CEO of “I am the top 1%” Corporation, which has a capital structure of 60% equity and 40% debt. The estimated net income of your company is $600K. Your capital budget is $800K for the coming year. If you follow the residual dividend models, how much dividend you can pay and what is your pay-out ratio? What happens to dividend when estimated net income is $400K or $800K?
6. Discuss the advantages and disadvantages of Residual dividend policy.
7. What are the steps you consider in setting your dividend policy?
8. Explain the concept of DRIP with an example.
9. Discuss the differences between the stock split and stock dividends.
10. Discuss the concept of share repurchases. What are the advantages and disadvantages of share-repurchase?

Answer 1

Answering first 4 questions including sub-section as per policy, kindly re-post the remaining .

Answer 1)

The Dividend Policy is a money related choice that alludes to the extent of the association's income to be paid out to the investors. Here, a firm settles on the segment of income that will be appropriated to the investors as profits or to be furrowed once again into the firm.

The measure of profit to be held back inside the firm relies on the accessibility of speculation openings. To assess the productivity of a chance, the firm evaluates a connection between the pace of profit for investment and the expense of capital

According to the profit models, a few professionals accept that the investors are not worried about the association's profit arrangement and can understand money by selling their offers whenever required. While the others accepted that, profits are pertinent and have a course on the offer costs of the firm.

Answer 2)

As indicated by Miller and Modigliani Hypothesis or MM Approach, profit arrangement has no impact on the cost of the portions of the firm and accepts that it is the venture strategy that builds the company's offer worth.

The financial specialists are happy with the association's held profit as long as the profits are more than the value capitalization rate "Ke". What is a value capitalization rate? The rate at which the income, profits or incomes are changed over into value or estimation of the firm. On the off chance that the profits are not exactly "Ke" at that point, the investors might want to get the income as profits.

Presumptions of model are:

• an ideal capital market,
• no duties
• a consistent investment approach
• no vulnerability about the future benefits.

Answer 3) Advantage of dividend stocks are

• Growth and Expansion of income

• Regular income

• Tax advantage

• Reduction in invest risk

• Reduction in volatility

• Protect Purchasing Power of Capital

Disadvantage of dividend stock are

• reinvestment risk
• interest rate risk

Answer Iv a)

Dividend signaling is a hypothesis that recommends that an organization declaration of an expansion in profit payouts means that positive future possibilities. The hypothesis is legitimately attached to game theory concept; Managers and potential investors are bound to signal. While the idea of profit flagging has been generally challenged, the hypothesis is as yet an idea utilized today by certain financial specialists.

Increments in an organization's dividend payout for the most part estimate a positive future execution of the organization's stock. Then again, diminishes in profit payouts will in general precisely forecast negative future execution by the organization.

Numerous speculators screen an organization's income, which means how a lot of money the organization creates from activities. In the event that the organization is gainful, it should create positive income, and have enough finances put aside in held profit to deliver out or increment profits. Held income is similar to a bank account that gathers abundance benefits to be paid out to investors or put once again into the business. In any case, an organization that has a lot of money on its monetary record can even now encounter quarters with low income development or misfortunes.