FIN 307 Temple University CH15 Distributions to Shareholders and Capital Structure Essay

Complete the following textbook questions:

Chapter 14: Questions 14-3 through 14-5 on page 600


  • What      is the difference between a stock dividend and a stock split? As a      stockholder, would you prefer to see your company declare a 100% stock      dividend or a 2-for-1 split? Assume that either action is feasible.


  • One      position expressed in the financial literature is that firms set their      dividends as a residual after using income to support new investments.      Explain what a residual policy implies (assuming that all distributions      are in the form of dividends), illustrating your answer with a table      showing how different investment opportunities could lead to different      dividend payout ratios.


  • Indicate      whether the following statements are true or false. If the statement is      false, explain why.
    1. If a firm repurchases its stock in the open market,       the shareholders who tender the stock are subject to capital gains taxes.
    2. If you own 100 shares in a company’s stock and the       company’s stock splits 2-for-1, then you will own 200 shares in the       company following the split.
    3. Some dividend reinvestment plans increase the amount       of equity capital available to the firm.
    4. The Tax Code encourages companies to pay a large       percentage of their net income in the form of dividends.
    5. A company that has established a clientele of       investors who prefer large dividends is unlikely to adopt a residual       dividend policy.
    6. If a firm follows a residual dividend policy then,       holding all else constant, its dividend payout will tend to rise whenever       the firm’s investment opportunities improve.

Chapter 15: Questions 15-1 through 15-5 on page 647


  • Define each of the following terms:
    • Capital structure; business risk; financial risk
    • Operating leverage; financial leverage; break-even point
    • Reserve borrowing capacity


  • What term refers to the uncertainty inherent in projections of future ROIC?


  • Firms with relatively high nonfinancial fixed costs are said to have a high degree of what?


  • “One type of leverage affects both EBIT and EPS. The other type affects only EPS.” Explain this statement.


  • Why is the following statement true? “Other things being the same, firms with relatively stable sales are able to carry relatively high debt ratios.”

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