FIN 301 Study Guide - Quiz Guide: Dividend Payout Ratio, Dividend Yield, Private Equity

Three parts to the question:

1a. When the stock prices changes around the declaration date indicate that important information is contained in its dividend announcements. This would validate the ______________ hypothesis

a. dividend irrelevance

b. bird in hand

c. information content

d. clientele

e. residual dividend policy

1b. Catering theory (or clientel effect)

a. is when firms cater to the preference of its investors

b. is when a firm contracts out for food service for its annual meeting

c. is when a firm refuses to pay a dividend

d. is when a firm pays out "all" of its earnings in dividends

1c. Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

a. Its earnings become more stable

b. Its access to the capital markets increases

c. Its R&D efforts pay off, and it now has more high-return investment opportunities

d. Its accounts receivable decrease due to a change in its credit policy

e. Its stock price has increased over the last year by a greater percentage than the increase in the broad stock market averages

Below is given a discussion. Please reply to the following discussion below. Your reply should include whether you agree or diagree, why? what are your reasons behind agreeing or disagreeing? Whether the facts selected are wrong or right. Please answer in atleast 150 to 200 words.

question: From the scenario, examine the dividend rate that TFC is paying in order to determine if the company should receive a rate adjustment. Suggest whether TFC’s dividends should either (1) stay the same; (2) be increased; (3) or go down. Provide a rationale for your response.

discussion: TFC is paying a $10.00 per share dividend rate annually. When TFC is considering the amount and frequency of the payout for dividends they must consider what they will need for future earnings growth, as that is what should be left after they determine the fair and correct amount for a dividend and frequency of a payout. High growth firms early in their life usually have a very low or zero payout ratio. As they mature, usually you will they will tend to return more of the earnings back to its investors.

The average rate was 74.20% and in the 1990’s it remained somewhere around 23.2%, a fraction of what dividends used to be. They should remain at $10.00 per share per year. I feel like if they can afford this in the midst of their expansion, they can almost promise on the back end of the expansion a higher and maybe more frequent dividend payout to their investors. I think the investors will appreciate keeping the payout where it is considering the company’s growth.

In 2011 the Keenan Company paid dividends totaling $3,760,000 on net income of $15 million. Note that 2011 was a normal year and for the past 10 years, earnings have grown at a constant rate of 6%. However, in 2012, earnings are expected to jump to $19.5 million and the firm expects to have profitable investment opportunities of $10.8 million. It is predicted that Keenan will not be able to maintain the 2012 level of earnings growth because the high 2012 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2012, the company will return to its previous 6% growth rate. Keenan's target capital structure is 40% debt and 60% equity.

1. Calculate Keenan's total dividends for 2012 assuming that it follows each of the following policies: (Write out your answers completely. For example, 25 million should be entered as 25,000,000.)
   
   
   1. Its 2012 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. Round your answer to the nearest cent.
      $
   2. 
      
   3. It continues the 2011 dividend payout ratio. Round your answer to the nearest cent.
      $
   4. 
      
   5. It uses a pure residual dividend policy (40% of the $10.8 million investment is financed with debt and 60% with common equity). Round your answer to the nearest cent.
      $
   6. 
      
   7. Assume that investors expect Keenan to pay total dividends of $6,000,000 in 2012 and to have the dividend grow at 6% after 2012. The stock's total market value is $220 million. What is the company's cost of equity? Round your answer to two decimal places.
      %
   8. 
      
   9. What is Keenan's long-run average return on equity? [Hint: g = Retention rate x ROE = (1.0 - Payout rate)(ROE).] Round your answer to two decimal places.
      %
   10. It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual policy. Round your answer to the nearest cent.
       
       

       Regular-dividend	$
       Extra dividend	$