1) Describe the residual theory of dividends and the key arguments about dividend irrelevance and relevance.

2) What five factors do firms consider in establishing dividend policy? Briefly describe each of them.

3) Prata has ten million shares outstanding, generates free cash flows of RM 60 million each year and has a cost of capital of 10%. It also has RM40 million of cash on hand. Prata wants to decide whether to repurchase stock or invest the cash in a project that generates free cash flows of RM2 million each year.

Should Prata invest or repurchase the shares?

4) Belon Companies has the following stockholders equity account:

Common stock (350,000 shares at RM3 par)	$1,050,000
Paid-in capital in excess of par	$2,500,000
Retained earnings	$ 750,000
Total stockholders equity	$ 4,300,000

Assuming that state laws define legal capital solely as the par value of common stock, how much of a per-share dividend can Belon pay? If legal capital were more broadly defined to include all paid-in capital, how much of a per-share dividend could Belon pay?