Question

6) Discuss (=in one sentence) whether the following statements are true or false.

A) The payment of cash dividends to shareholders is a deductible expense for the company.

B) Unlike coupon payments on bonds, which are treated as an interest expense of the firm, common stock dividends are considered a return of capital to shareholders and not an expense of the firm.

C) For the shareholder, receipt of dividends is a taxable event.

D) A typical practice of many companies is to distribute part of the earnings to shareholders through cash dividends.

E) If an investor purchases 20% of the initial issue of the company, the investor then owns 20% of the company, given the one vote-one share norm.

F) After an initial offering, the company can sell more shares to the public at a later date. If the investor who originally purchased 20% does not purchase 20% of the subsequent issue, his or her ownership is diluted below 20%.

G) A preemptive right enables one to maintain one's proportional level of ownership.

H) A preemptive right is never particularly valuable to shareholders with large ownership percentages.

9)) The Nimnim  Company just paid an annual dividend of $1.12. If you expect a constant growth rate of 4% and have a required rate of return of 13%, what is the current stock price according to the constant growth dividend model?

10) a) In 2012 Kabir Inc paid $1.25 as dividend. In the most recent dividend in 2019 the dividend was  $1.80. The number of years between these two dividends (n) is 7 years. If the required return of 12.21%. What is the current stock price if we anticipate dividends stopping in 10 years (because the company will go bankrupt)? B) if the company pays the dividends forever (does not go bankrupt) what is the current stock price?

Answer 1

a)

False

Because...Dividends are appropriation of distribution of profits to owners, not an expense.

b)

True

Because...Dividends are appropriation of distribution of profits to owners, not an expense

c)

True

Because...Dividends are an Income for the shareholder. They are taxed at Long Term Capital Gain Tax Rate.

d)

True

Because...Many Companies prefer to keep distributing some part of the earnings, at the same time retaining some part for expansion.

Note: As per guidelines, we are supposed to answer only 4 sub-questions.