1. Under Modigliani and Miller assumptions, explain how a company can maintain a fixed investment plan yet still pay a dividend to shareholders in excess of the companys current earnings?
2. Discuss how a shareholder in a company that pays no dividends can create a home-made dividend. What might be the tax consequences of this action under a classical tax system? Assume a 50% discount on capital gains.
3. Considering agency theory, when might a company paying dividends be valued higher than one not paying dividends (given that shareholders can create home-made dividends)?
4. Lintners (1956) findings suggests that shareholders are more concerned with any changes made to dividend levels rather than the actual amount of the dividend itself. Why might this be so? Briefly explain.