Question

According to Bhattacharya 1979 outside investors have imperfect information about firms' profitability and that cash dividends are taxed at a higher rate than capital gains. It is shown that under these conditions, such dividends function as a signal of
expected cash flows. By structuring the model so that finite-lived investors turn over continuingprojects to succeeding generations of investors, we derive a comparative static result that relates the equilibrium level of dividend payout to the length of investors' planning horizons.  
Question:
in the context of Bhattacharya 1979 model assume that the personal tax rate is 25%.The penalty associated with a shortfall is 50%,the projects cash flows are uniformly distributed over (0,500) and the appropriate discount rate is 20%.what is the optimal dividend and value response to this dividend?what is the impact of changing the personal tax rate to 30%?changing shortfall to 70%?changing discount rate to 40%?

Answer 1

Stock Standard Deviation Beta
A 20% 0.59
B 10% 0.61
C 12% 1.29

If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

a. A; A.
b. A; B.
c. B; A.
d. C; A.
e. C; B.
Answer: c

2. Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

a. Variance; correlation coefficient.
b. Standard deviation; correlation coefficient.
c. Beta; variance.
d. Coefficient of variation; beta.
e. Beta; beta.
Answer: d