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Question 4 (8 marks) In class we discussed several theories of dividend policy. Identify the theory behind the dividend policy being used by each of the following firms. Briefly explain your answers. (One or 2 sentences per firm.) Firm A is a successful manufacturer of high-tech equipment. Despite having had sizable, growing profits for the past several years, it has been careful to maintain a policy of only small, steady increases in dividends, far below what it could afford to pay. Last week, however, it received word that a judge had rejected a competitor's appeal in an obscure legal case involving a critical patent Firm A holds. The ruling means Firm A is now the clear owner of the patent for a very successful product. Firm A decides to double its dividend. What dividend theory is it following? Firm B is identical in almost every respect to firm A above - except for its dividend policy. It is also a successful, profitable high tech equipment manufacturer, but it has never paid dividends. It also just won a major patent case, and some managers at the firm are urging the Chief Financial Officer that now is the time to initiate a dividend, especially since Firm A has announced a dividend increase. The Chief Financial Officer replies: "I know our shareholders and I don't believe they want dividends." What dividend theory is he following? Firm C is a North American cigarette manufacturing company. It makes high profits, but knows that the future for its products and profits is limited. It knows it will not be able to expand its business or need to build any new factories. For the past several years it has had the following payout policy: Pay a cash dividend of $2/share every year and every third year pay a "special" dividend equal to the total amount of the earnings it has retained over the past 3 years divided by the number of shares outstanding. What dividend policy is it following? Firm D runs a series of wellness spas in La-la land, a fantastic country with the world's only source of "La" - a recently-discovered substance that makes everyone happy. Due to the enormous wealth that will be generated by exporting "La" to the rest of the world, La-la land has been able to abolish all taxes. Furthermore, its investors can trade securities without brokerage fees. Some of the financial managers of the spa firm approach the Chief Financial Officer (CFO) and ask what they should pay for dividends this quarter. "Whatever you like," says the CFO. "And next quarter we may change it - we'll pay whatever we feel like then." What dividend theory is being followed? Question 4 (8 marks) In class we discussed several theories of dividend policy. Identify the theory behind the dividend policy being used by each of the following firms. Briefly explain your answers. (One or 2 sentences per firm.) Firm A is a successful manufacturer of high-tech equipment. Despite having had sizable, growing profits for the past several years, it has been careful to maintain a policy of only small, steady increases in dividends, far below what it could afford to pay. Last week, however, it received word that a judge had rejected a competitor's appeal in an obscure legal case involving a critical patent Firm A holds. The ruling means Firm A is now the clear owner of the patent for a very successful product. Firm A decides to double its dividend. What dividend theory is it following? Firm B is identical in almost every respect to firm A above - except for its dividend policy. It is also a successful, profitable high tech equipment manufacturer, but it has never paid dividends. It also just won a major patent case, and some managers at the firm are urging the Chief Financial Officer that now is the time to initiate a dividend, especially since Firm A has announced a dividend increase. The Chief Financial Officer replies: "I know our shareholders and I don't believe they want dividends." What dividend theory is he following? Firm C is a North American cigarette manufacturing company. It makes high profits, but knows that the future for its products and profits is limited. It knows it will not be able to expand its business or need to build any new factories. For the past several years it has had the following payout policy: Pay a cash dividend of $2/share every year and every third year pay a "special" dividend equal to the total amount of the earnings it has retained over the past 3 years divided by the number of shares outstanding. What dividend policy is it following? Firm D runs a series of wellness spas in La-la land, a fantastic country with the world's only source of "La" - a recently-discovered substance that makes everyone happy. Due to the enormous wealth that will be generated by exporting "La" to the rest of the world, La-la land has been able to abolish all taxes. Furthermore, its investors can trade securities without brokerage fees. Some of the financial managers of the spa firm approach the Chief Financial Officer (CFO) and ask what they should pay for dividends this quarter. "Whatever you like," says the CFO. "And next quarter we may change it - we'll pay whatever we feel like then." What dividend theory is being followed