Dividend and Dividend Policies
1. Which two of the following are ways for a company to return money to shareholders?
a. Payment of a dividend in cash
b. Payment of a dividend in shares of stock
c. Repurchasing shares
d. Splitting the stock 5:1
2. Which two of the following are reasons that companies should pay dividends?
a. The payment of dividends forces the company to seek more external financing, which subjects the company to the scrutiny of investors.
b. Companies should not reinvest excess cash.
c. Dividends provide a way for the management to inform investors about the company’s future prospects.
d. Due to the way in which dividends are taxed, investors should prefer the retention of funds to the payment of dividends.
3. Which of the following are reasons that companies should not pay dividends?
a. The dividend irrelevance theory and the tax preference theory
b. The bird in the hand theory and the agency theory
c. The signaling theory and the agency theory
“Dividend”ed We Stand / Gordon Growth Model
Show your work for partial credit
1. Last year, CompanyX paid a dividend of $2 per share. Use a growth rate of 2% per year and a discount rate of 5% to value the stock. What is the implied stock price? Write your answer in dollars and cents, for example, $123.45.
LewCo, a construction company, pays an annual dividend to the stock owners on the last day of each year. LewCo paid a dividend of $10 per share on December 31, 2019. LewCo has increased the dividend by 6% per year since the company started in 1958, and investors believe this will continue.
2. Today is January 1, 2020, and the stock price is $400 per share. What expected return (r*, discount rate, cost of capital) are investors attaching to LewCo based on the Gordon Growth Model? Write your answer in percentage points and basis points, for example, 12.34%.
3. Based on the model, what will be the stock price on January 1, 2021 (one year in the future)? Remember that the company pays a dividend on December 31 of each year; your answer should be the value after the dividend payment on December 31, 2020.
Write your answer in dollars and cents, for example, $123.45.
Assume an investor purchased $100,000 of LewCo stock on January 1, 2020, and liquidated (sold) it a year later on January 2, 2021, after receiving the dividend payment.
4. What is the investor’s price return or capital gain?
Write your answer in BOTH dollars and cents and in percentage points.
5. What is the investor’s total return?
Write your answer in BOTH dollars and cents and in percentage points.
