Response to the following questions:
1. 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 percent stock dividend or a 2-for-1 split? Assume that either action is feasible.
2. One position expressed in the financial literature is that firms set their dividends as a residual after using income to support new investment.
a. Explain what a residual policy implies (assuming all distributions as dividends), illustrating your answer with a table showing how different investment opportunities could lead to different dividend payout ratios.
b. We considered the relationship between capital structure and the cost of capital. If the WACC-versus-debt-ratio plot was shaped like a sharp V, would this have a different implication for the importance of setting dividends according to the residual policy than if the plot was shaped like a shallow bowl (or a flattened U)?