Distribution of Retained Earnings: Dividends and Stock Repurchases: Basic Concepts

a. This theory contends that a firms dividend policy will not impact either the value of the firm or its cost of capital.

b. According to this theory, an announced dividend payment that exceeds investors expectations is interpreted to be good news and should be expected to increase the price of the firms common stock, whereas an announced dividend that is less than investors expectations is construed as bad news and should be expected to decrease the firms share price.

c. On this date, the firm closes its stock transfer, or stock ownership, book, and the shareholders recorded in the book will receive the firms next declared dividend.

d. According to this policy, the amount of dividends paid is equal to the amount of the firms net earnings minus the amount of retained earnings necessary to finance the firms optimal capital budget.

e. Under this activity, a firm with 100,000 shares of outstanding stock, each trading for $44 per share, doubles the number of shares outstanding, causing the per-share market value of the shares to decrease to $22.

f. If a firms net income varies from year to year, this dividend policy exposes a shareholder to uncertainty regarding the amount of dividends to be received each year.

g. This program automatically uses a shareholders dividends to acquire additional shares of a firms outstanding or newly issued stock.

h. This dividend policy maximizes the price of a firms common stock.

i. A dividend that is paid in the form of additional shares of the paying firms stock rather than in cash.

j. An earnings distribution activity used to adjust the firms capital structure, acquire additional shares for its employee option or compensation plans, prevent a possible takeover attempt, or increase the market value of the firms stock by reducing the number of shares outstanding.