LOS Explanation In the residual dividend approach, dividends are based on earnings less funds the firm retains to finance the equity portion of its capital budget. Advantages: (1) easy for the company to use, (2) maximizes allocation of earnings to investment. Disadvantages: (1) dividend fluctuates with investment opportunities and earnings, (2) uncertainty causes higher expected return and lower valuation. Other dividend policy approaches include: Longer-term residual dividend: Company forecasts its capital budget over a longer time frame and attempts to provide a more steady dividend payout. Dividend stability: Company tries to align its dividend growth rate with the company’s long-term growth rate to provide a steadily increasing dividend. Target payout ratio: Company defines a proportion of earnings that it plans to pay out to shareholders over the long term.
- A only S1= correct 18. C Both are CORRECT 19. A (Both are FALSE)
Which of the following dividend policies would a firm with temporary excess cash flows most likely use? A share repurchase program: A) and no payout of dividends. B) and a growing dividend model. C) in conjunction with a residual dividend model. Under the residual dividend model, firms would do all of the following EXCEPT: A) pay dividends only if more earnings are available than needed to support the optimal capital budget. B) determine their optimal capital budgets. C) borrow money to maintain the dividend payout schedule. Which of the following statements regarding dividend policies is TRUE? A) A target payout ratio approach is likely to result in a lower risk premium assigned to a company by investors. B) Companies using a longer-term residual dividend policy pay a steady dividend based on long-term forecast of their capital budget. C) Companies following a dividend stability policy seek to pay a constant dollar amount per share over a long period of time. Tina Donaldson is the Chief Financial Officer for Outback Supply Corporation (OSC). OSC is considering revising its dividend payout policy and Donaldson has been asked by the board of directors to suggest alternatives for the board to consider. Donaldson prepares a memo listing the benefits of a residual dividend model. The memo includes three key points: Point 1: A residual dividend policy is simple for the company to use and easy to implement. Point 2: The residual dividend approach allows management to determine investment opportunities without having to take dividends into consideration. Point 3: Because the firm is maximizing its positive net present value opportunities with a residual dividend model, investors are likely to perceive the firm as having less risk. Which of Donaldson’s points describing advantages of the residual dividend approach are most accurate? A) Point 2 only. B) Points 1 and 2 only. C) Points 1, 2, and 3. The Skubin Candy Company is a highly profitable and rapidly growing maker of chocolates and other confections. Skubin’s management team is considering various dividend policies and is most concerned about the possibility of the dividend amount decreasing from one year to another and the negative reaction from investors that such a decrease may cause. Under which dividend policy would Skubin’s dividend be most likely to decline in a given year? A) Target payout ratio. B) Longer-term residual dividend. C) Residual dividend. Hikaru Takei is the portfolio manager for the Reliant Dividend Focused Fund. Takei wants to add a firm to his portfolio that follows a stable dividend policy. Takei is considering investing in one of three companies: Kirk Beauty Supplies maintains a constant dividend payout of 25 to 30%. Kelley Medical Devices increases its dividend each year in accordance with the company’s long run growth rate of 4%. Barrett Satellite Systems has maintained a dividend of $2.00 per share over the last 6 years. Which stock best meets Takei’s criteria? A) Barrett Satellite Systems. B) Kelley Medical Devices. C) Kirk Beauty Supplies Back to work after these…How was day 3?
ditchdigger2CFA Wrote: ------------------------------------------------------- > Which of the following dividend policies would a > firm with temporary excess cash flows most likely > use? A share repurchase program: > > A) and no payout of dividends. > > B) and a growing dividend model. > > C) in conjunction with a residual dividend model. 21. C > > Under the residual dividend model, firms would do > all of the following EXCEPT: > > A) pay dividends only if more earnings are > available than needed to support the optimal > capital budget. > > B) determine their optimal capital budgets. > > C) borrow money to maintain the dividend payout > schedule. > 22. C > Which of the following statements regarding > dividend policies is TRUE? > > A) A target payout ratio approach is likely to > result in a lower risk premium assigned to a > company by investors. > > B) Companies using a longer-term residual > dividend policy pay a steady dividend based on > long-term forecast of their capital budget. > > C) Companies following a dividend stability > policy seek to pay a constant dollar amount per > share over a long period of time. > 23. C > Tina Donaldson is the Chief Financial Officer for > Outback Supply Corporation (OSC). OSC is > considering revising its dividend payout policy > and Donaldson has been asked by the board of > directors to suggest alternatives for the board to > consider. Donaldson prepares a memo listing the > benefits of a residual dividend model. The memo > includes three key points: > > Point 1: A residual dividend policy is simple for > the company to use and easy to implement. > > Point 2: The residual dividend approach allows > management to determine investment opportunities > without having to take dividends into > consideration. > > Point 3: Because the firm is maximizing its > positive net present value opportunities with a > residual dividend model, investors are likely to > perceive the firm as having less risk. > > Which of Donaldson’s points describing advantages > of the residual dividend approach are most > accurate? > > A) Point 2 only. > > B) Points 1 and 2 only. > > C) Points 1, 2, and 3. 24. B (p1 and p2 only ------ p3 should be opposite) > > The Skubin Candy Company is a highly profitable > and rapidly growing maker of chocolates and other > confections. Skubin’s management team is > considering various dividend policies and is most > concerned about the possibility of the dividend > amount decreasing from one year to another and the > negative reaction from investors that such a > decrease may cause. Under which dividend policy > would Skubin’s dividend be most likely to decline > in a given year? > > A) Target payout ratio. > > B) Longer-term residual dividend. > > C) Residual dividend. 25. C? > > Hikaru Takei is the portfolio manager for the > Reliant Dividend Focused Fund. Takei wants to add > a firm to his portfolio that follows a stable > dividend policy. Takei is considering investing in > one of three companies: > > Kirk Beauty Supplies maintains a constant dividend > payout of 25 to 30%. > Kelley Medical Devices increases its dividend each > year in accordance with the company’s long run > growth rate of 4%. > Barrett Satellite Systems has maintained a > dividend of $2.00 per share over the last 6 years. > > Which stock best meets Takei’s criteria? > > A) Barrett Satellite Systems. > > B) Kelley Medical Devices. > > C) Kirk Beauty Supplies 26. A > > Back to work after these…How was day 3? AWESOMEMEEE
Which of the following dividend policies would a firm with temporary excess cash flows most likely use? A share repurchase program: A) and no payout of dividends. B) and a growing dividend model. C) in conjunction with a residual dividend model. A Under the residual dividend model, firms would do all of the following EXCEPT: A) pay dividends only if more earnings are available than needed to support the optimal capital budget. B) determine their optimal capital budgets. C) borrow money to maintain the dividend payout schedule. C Which of the following statements regarding dividend policies is TRUE? A) A target payout ratio approach is likely to result in a lower risk premium assigned to a company by investors. B) Companies using a longer-term residual dividend policy pay a steady dividend based on long-term forecast of their capital budget. C) Companies following a dividend stability policy seek to pay a constant dollar amount per share over a long period of time. C Tina Donaldson is the Chief Financial Officer for Outback Supply Corporation (OSC). OSC is considering revising its dividend payout policy and Donaldson has been asked by the board of directors to suggest alternatives for the board to consider. Donaldson prepares a memo listing the benefits of a residual dividend model. The memo includes three key points: Point 1: A residual dividend policy is simple for the company to use and easy to implement. Point 2: The residual dividend approach allows management to determine investment opportunities without having to take dividends into consideration. Point 3: Because the firm is maximizing its positive net present value opportunities with a residual dividend model, investors are likely to perceive the firm as having less risk. Which of Donaldson’s points describing advantages of the residual dividend approach are most accurate? A) Point 2 only. B) Points 1 and 2 only. C) Points 1, 2, and 3. B, although it very well could be C. The Skubin Candy Company is a highly profitable and rapidly growing maker of chocolates and other confections. Skubin’s management team is considering various dividend policies and is most concerned about the possibility of the dividend amount decreasing from one year to another and the negative reaction from investors that such a decrease may cause. Under which dividend policy would Skubin’s dividend be most likely to decline in a given year? A) Target payout ratio. B) Longer-term residual dividend. C) Residual dividend. C Hikaru Takei is the portfolio manager for the Reliant Dividend Focused Fund. Takei wants to add a firm to his portfolio that follows a stable dividend policy. Takei is considering investing in one of three companies: Kirk Beauty Supplies maintains a constant dividend payout of 25 to 30%. Kelley Medical Devices increases its dividend each year in accordance with the company’s long run growth rate of 4%. Barrett Satellite Systems has maintained a dividend of $2.00 per share over the last 6 years. Which stock best meets Takei’s criteria? A) Barrett Satellite Systems. B) Kelley Medical Devices. C) Kirk Beauty Supplies A? crap, i need to read over corp fi again. this is all fuzzy.
Your answer: A was incorrect. The correct answer was C) in conjunction with a residual dividend model. The residual dividend model allows firms to pay out dividends only if more earnings are available than are needed to support the optimal capital budget. Because dividend payouts can be unstable, a firm can supplement a low, stable dividend with a share repurchase program or with an extra dividend when times are good. Stock repurchases allow management to distribute cash without signaling information about future earnings. Abnormally good years could be followed with the purchase of shares, while selling shares would provide liquidity during temporary cash shortages. Your answer: C was correct! Under the residual dividend model the optimal dividend payout is a function of four factors: investors’ preferences for dividends vs. capital gains, the firm’s investment opportunity schedule (IOS), the firm’s target capital structure, and the availability and cost of external capital to the firm. The firm will pay dividends only if more earnings are available than are needed to support the optimal capital budget. Your answer: B was correct! Companies following a longer-term residual dividend approach forecast their capital budget over a longer time frame (5-10 years). Leftover earnings over this period are allocated as dividends and paid out in relatively equal amounts each year. The other statements are incorrect. With a stable dividend policy, companies seek to increase their dividend each year at a constant rate. A strict target payout approach means that dividends will vary in proportion with earnings, likely resulting in volatile dividends and a higher risk premium. Your answer: B was correct! The residual dividend approach is easy for a company to use and implement – the company simply reinvests earnings needed to maintain and grow the business, and pays out any left over earnings out as dividends. The residual dividend approach also allows management to determine investment opportunities without having to take dividends into consideration. Note that the residual dividend approach is likely to lead to dividends that fluctuate dramatically from year to year. Since investors prefer stable dividends, they are likely to perceive a firm following a residual dividend approach as having greater risk, which is one of the disadvantages of the approach. Your answer: A was incorrect. The correct answer was C) Residual dividend. Since Skubin Candy Corporation is a profitable, rapidly growing company, a target payout policy is likely to lead to consistent dividend increases. A residual dividend approach, however, could lead to a decrease in the dividend if the company has sufficient positive NPV investment opportunities, thus leaving fewer dollars available for dividend payments Your answer: B was correct! Due to inflation considerations, a company with a stable dividend policy will have stability in the rate of increase for its dividend each year. This typically means aligning the company’s dividend growth rate with its long-term growth rate. Although the company with the fixed per share dividend is a tempting choice, once inflation is considered, a fixed $2.00 per share dividend is actually declining each year in terms of spending power.
wow, 2 of the 3 I booted simply b/c i didn’t know what a stable div policy is. bad me. thank you for illuminating that one, esp the last q with inflation. stable = not constant, but rather stability in rate of increase for div yearly. the 1st q- they’re talking about having some low stable div, but isn’t that a stable div policy and not a residual policy? i thought residual was paying out what’s leftover, which made me think you wouldn’t typically if you had that sort of policy have the option to repurchase stock (since you’re paying that $$ out in residual divs?). Your answer: A was incorrect. The correct answer was C) in conjunction with a residual dividend model. The residual dividend model allows firms to pay out dividends only if more earnings are available than are needed to support the optimal capital budget. Because dividend payouts can be unstable, a firm can supplement a low, stable dividend with a share repurchase program or with an extra dividend when times are good. Stock repurchases allow management to distribute cash without signaling information about future earnings. Abnormally good years could be followed with the purchase of shares, while selling shares would provide liquidity during temporary cash shortages.
banni - That is what was asking yesterday in my post here http://www.analystforum.com/phorums/read.php?12,904362. I was confused with ‘stability in rate of increase for div due to inflation’. Ahh well - 23/26 correct and i’ll take it more than happily for today. ditchdigger2CFA - awesome job mate.
swaptiongamma Wrote: ------------------------------------------------------- > banni - That is what was asking yesterday in my > post here > http://www.analystforum.com/phorums/read.php?12,90 > 4362. > > I was confused with ‘stability in rate of increase > for div due to inflation’. > > > Ahh well - 23/26 correct and i’ll take it more > than happily for today. > > ditchdigger2CFA - awesome job mate. swaptiongamma You’re welcome! I’ll do this as often as possible. To be quite honest, I need to step up my studying. Alot of this is foreign to me and answering questions after the brief LOS summary sure is an eye opener, but no substitute for reading the text. Any requests for tomorrow? The tax work is starting to get busy!
swaption- i hadn’t seen that yesterday one- i guess your 1st part answer would be no then- it doesn’t mean 31 cents forever afterall, per the ditch part of the answer: “With a stable dividend policy, companies seek to increase their dividend each year at a CONSTANT RATE” and “Due to inflation considerations, a company with a stable dividend policy will have stability in the rate of increase for its dividend each year. This typically means aligning the company’s dividend growth rate with its LONG TERM GROWTH RATE” ditch- these are good. makes me feel less guilty for not having hammered qbank at all yet. it is nice to get these little topic reinforcements. quant is far and away my worst topic. econ is one where it’s always good to see a little review to just remember the different parity equations (i forget them all quickly). really, there’s no bad topic for these. maybe pick ones that others have read through already? seems like the new folks have done quant, econ, some of FSA/corp fi so far from the posts I’ve been gathering. but i’ll do these in whatever topic. thx for taking the time to gather q’s in one area to hit home on specific topics.