FINA 351 – Managerial Finance, Chapter 14, (Ref. 14a)
(Note: because of the exam on Monday, the due date for this assignment is mid-night on Wednesday)
Read Ch. 14 and answer the following questions:
1. T or F: The heart of the dividend policy question is whether stock investors would rather have a dollar in their
wallets or have the dollar invested in their company.
2. In a typical corporate life cycle, a company moves from the start-up stage (when its product or service is
new), through a growth stage (where the market is absorbing the product/service quickly) to a maturity stage
(where the market has more or less absorbed the product/service). A company can be in the maturity stage for
many decades. Unless a company can maintain or grow its competitive advantage, it will likely end up the
decline stage.
(A) Why do you think that start-up companies usually do not pay dividends?
(B) Why do you think mature companies usually begin to pay dividends?
3. Go to http://finance.yahoo.com/echarts?s=MSFT#%7B%22range%22%3A%7B%22start%22%3A%22200201-30T20%3A00%3A00.000Z%22%2C%22end%22%3A%222014-1112T20%3A00%3A00.000Z%22%7D%2C%22scale%22%3A%22linear%22%7D. Extend the chart to the
maximum period. You will find dividend and stock split information at the bottom of the chart. Hover the
cursor over the icons to get specific information.
(A) When did MSFT pay its very first dividend? Why do think it started to pay dividends? (two reasons –
hint – see D and E)
(B) How much were the first four dividend amounts? Do you see any anomalies?
(C) For year-ended June 30, 2014, MSFT had net income of $22.1 billion and it paid out dividends of $8.9
billion. What was its dividend payout ratio? (Hint: see Section 3.4 in Ch. 3 for formula).
(D) In the corporate life cycle, what stage do you think MSFT is in? (Intro, Growth, Maturity, or Decline
Stage?) How would MSFT’s dividend payout ratio be influenced by the stage it is in?
(E) What effect do you think Bush’s dividend tax cut in 2003 had on dividend payout ratios? (Note: Bush
lowered the maximum tax rate on dividends to 15%).
4. Assume that on Tuesday, Dec. 8, the board of Northwest Power Company declared a cash dividend of $1.00,
payable on Tuesday, Jan. 26, to shareholders of record on Tuesday, Jan. 12.
(A) On what day is the ex-dividend date?
(B) Who gets the dividend if shares of stock are traded before the ex-dividend date, the buyer or the seller?
(C) If the price of the stock was $50 before the ex-dividend date, what would the stock price be (approx.) on
the ex-dividend date?
5. Go to http://finance.yahoo.com/, enter the ticker for AT&T (“T”) and click on Key Statistics. Under
Dividends and Splits, find and record the following:
(A) Forward Annual Dividend Rate (annual dollar amount of anticipated dividend)
(B) Forward Annual Dividend Yield (dividend amount divided by yesterday’s closing stock price)
(C) 5 year Average Dividend Yield (not bad, eh?)
(D) Ex-Dividend Date
(E) Dividend Payment Date (dividend date)
(F) Payout Ratio (annual dividend amount per share divided by earnings per share)
(G) Would you agree that AT&T’s stock is a bargain just based on dividends, without even considering any
capital gains?
6. Why is deciding on a dividend policy similar to a two-handed-lawyer?
7. What factors favor a low dividend payout?
8. What factors favor a high-dividend payout?
9. Endowments are created when donors specify that the original gift be invested forever and only the
investment income be used. This allows the donor to make a lasting contribution to the institution. WWU
has an endowment worth about $18 million and a church subsidy that provides cash flow equivalent to
another $100 million endowment. Whitman College, on the other hand, has an endowment of some $400
million. Both institutions started in the late 1800s.
(A) Why do you think Whitman’s endowment is so much larger than WWU’s?
(B) A large portion of endowment income is for student scholarships. In order to maximize current student
scholarships, do you think WWU should invest in stocks that pay high dividends or low dividends? Or
should it matter, since WWU is exempt from tax on dividend or capital gain income?
10. Do you think that Grandpa Jones (99 years old, living on Social Security) should invest in stocks that pay
high dividends or low dividends? Or should Grandpa be investing in stocks at all?
11. Firms can adopt one of several different dividend policies.
(A) Why might a firm adopt the zero approach?
(B) Why might a firm strive for the stable approach?
(C) Why might a firm have to settle for the compromise approach?
12. On the internet, go to http://www.dogsofthedow.com/ddogytd.htm. Answer the following questions:
(A) For the most recent data on the thirty stocks in the Dow, which industries appear to offer the highest
dividend yield?
(B) For the following industries, make a guess as to why each typically pays out high dividends: utilities and
pharmaceuticals.
(C) For the most recent data on the thirty stocks in the Dow, what is the average dividend yield?
(D) How does this dividend yield compare with the current rate offered on your bank savings account?