Dividend policy

Question 1

Traditional position of dividend policy

Answer 1

Constant dividend stream important
Better to have certainty than having to wait

Question 2

M&M position of dividend policy

Answer 2

Consistency of dividend is irrelevant

Question 3

Dividend signalling

Answer 3

M&M assumed investors had perfect info about the company
Reduction in dividend can signal bad news

Question 4

Clientele effect

Answer 4

M&M assumed investors were indifferent between dividends and capital growth
Investors require cash - can manufacture dividends by not selling shares (not the case)

Question 5

Pecking order theory

Answer 5

Choose:
1 Retained profit
2 rights issue
3 new issue

Make sure dividends lag behind earnings