Distributions to Shareholders: Dividends & Repurchases
1. List and briefly discuss two motivations that would lead a firm to engage in a stock repurchase versus a straight cash dividend.
2. Briefly describe the implications of the tradeoff between dividends and free cash flow retention.
3. Explain this statement: "Even though both the Constant Dividend Payout theory of dividends and the residual theory of dividends result in erratic dividends over time, both theories arrive at the same conclusion differently." (State the conclusion first, then in a new paragraph follow with the answer.)
4. In what way is the Modigliani/Miller dividend irrelevance theory similar to the residual dividend theory? (Think before you write.)
5. A. What is the "signaling hypothesis" as it regards a firm's dividend policy?
B. How might the signaling hypothesis be used to justify the observed practice of "dividend smoothing" in the real world?
6. Why would the effect of "signaling" be absent if information about the firm was symmetric (not asymmetric) regarding changes in a firm's dividend payout?
7. Using words only provide a plausible explanation why a firm's stock price will be maximized when its dividend policy accommodates its growth opportunities.
8. Using words only explain why the intrinsic value of equity stays the same for either a cash dividend or a stock repurchase when the cash paid out is the same?