Question

______     3.      If markets are perfect (and using the other assumptions in Miller and Modigliani (1961)), stock prices should fall by the amount of a cash dividend. If so, can a firm make its stockholders wealthier by changing (i.e., increasing or decreasing) its dividend?

A. No, under these assumptions, a firm cannot make its stockholders wealthier by changing its dividend.

B. Yes, under these assumptions, a firm can make its stockholders wealthier, but only by increasing its dividend.

C. Yes, under these assumptions, a firm can make its stockholders wealthier, but only by decreasing its dividend.

______     4.      A firm’s current stock price is $20 per share and the firm is planning a $1 per share cash dividend. The stock’s ex-dividend day is tomorrow. Assuming markets are perfect and using the other assumptions in Miller and Modigliani (1961), what is tomorrow’s expected stock price? (Focus solely on the effects of the cash dividend and ignore other events, news stories, etc. that could also affect the stock price.)

A. Tomorrow’s stock price is expected to be $19.

B. Tomorrow’s stock price is expected to be $21.

______     5.      Assume a firm has recently been paying a $1 per share regular cash dividend each year. Further assume that the firm’s managers expect the firm to have unusually high earnings in 2018, but then think that earnings will fall back to normal levels in 2019 and thereafter. Which of the following statements best describes how most firms would set their dividends based on this pattern in earnings?

A. Most firms would increase their regular cash dividends to a level higher than $1 in 2018, and then decrease their regular cash dividends back down to normal levels (i.e., back to $1 per share) in 2019 and thereafter.

B. Most firms would keep their regular cash dividends at the $1 level in 2018 and thereafter. In other words, most firms would not increase their regular cash dividends for only a one-year period.

Answer 1

3. if markets are perfect and using Miller and Modigliani assumptions, stock price declines by the same amount as cash dividend per share on the ex-date (net effect is 0). So the firm can't make its shareholders any more or any less wealthier. So answer is option a

4 if markets are perfect and using Miller and Modigliani assumptions, stock price declines by the same amount as cash dividend per share on the ex-date. SO stock price will be $19 ($20-$1). answer is option a

5. Since the earnings are going up temporarily for 1 year in 2019, most firms that want to match dividends and earnings will increase cash dividends in 2019 to a level more than $1. Thereafter they will bring it back to normal levels from 2020 onwards. SO answer is option a