1. Why do many managers prefer a stable dollar dividend policy to a policy of paying out a constant percentage of each year's earnings as dividends?
2. Under what circumstances would it make sense for a firm to borrow money to make its dividend payments?
3. Some people have suggested that it is irrational for a firm to pay dividends and sell new stock in the same year because the cost of newly issued equity is greater than the cost of retained earnings. Do you agree? Why or why not?
4. What is a dividend reinvestment plan? Explain the advantages of a dividend reinvestment plan to the firm and to shareholders.
5. Why do many firms choose to issue stock dividends? What is the value of a stock dividend to a shareholder?
6. What are the tax limitations on the practice of share repurchases as a regular dividend policy?
7. What effect do share repurchases (undertaken as part of the firm's dividend decision) have on the value of the firm?
8. You are the holder of common stock in the G. Lewis Apartment Renovation Company. Historically, the firm has paid generous cash dividends. The firm has recently announced that it would replace its cash dividend with a 20 percent annual stock dividend. Is this good news, bad news, or is it impossible to tell from the information provided? Explain the reason for your answer.
9. What issues of business ethics may be involved in the establishment of a firm's dividend payment amounts?
10. What role do most practitioners think dividend policy plays in determining share values?
11. How can the passive residual view of dividend policy be reconciled with the tendency of most firms to maintain a constant or steadily growing dividend payment record?