1. Briefly explain the problems associated with using the discounted payback method of analyzing a project.
2. Explain the "Dividend Irrelevance" theory and the "Dividend Preference" theory of dividends. Which of these is theoretically the most justified? Is there any real-world evidence that either one might be the most relevant?
3. Explain the residual distribution model of setting the target distribution level. Do we have any evidence that firms actually use this model? Assume a company is planning for capital expenditures in the amount of $45 million next year, and that they expect net income in the amount of $30 million. They would like to finance 60% of their capital budget with equity and maintain their dividend payout ratio of 30%. Explain the problem in using the residual model in this example, and suggest two specific things they could do to resolve it.
4. What are the advantages of stock repurchases versus cash dividends.
5. If you own 200 shares of the SSS Corporation which is currently priced at $120 per share, and they have a 20% stock dividend, how many shares will you have after the stock dividend and what would you expect to be the new market price per share (barring any other events that might affect stock prices)?