Discussion Post: Principles of Finance
• What is the difference between a stock dividend and a stock split? As a stockholder, would you prefer to see your company declare a 100% stock dividend or a 2-for-1 split? Assume that either action is feasible.
• One position expressed in the financial literature is that firms set their dividends as a residual after using income to support new investments. Explain what a residual policy implies (assuming that all distributions are in the form of dividends), illustrating your answer with a table showing how different investment opportunities could lead to different dividend payout ratios.
• Indicate whether the following statements are true or false. If the statement is false, explain why.
o If a firm repurchases its stock in the open market, the shareholders who tender the stock are subject to capital gains taxes.
o If you own 100 shares in a company's stock and the company's stock splits 2-for-1, then you will own 200 shares in the company following the split.
o Some dividend reinvestment plans increase the amount of equity capital available to the firm.
o The Tax Code encourages companies to pay a large percentage of their net income in the form of dividends.
o A company that has established a clientele of investors who prefer large dividends is unlikely to adopt a residual dividend policy.
o If a firm follows a residual dividend policy then, holding all else constant, its dividend payout will tend to rise whenever the firm's investment opportunities improve.
• Define each of the following terms:
o Capital structure; business risk; financial risk
o Operating leverage; financial leverage; break-even point
o Reserve borrowing capacity
• What term refers to the uncertainty inherent in projections of future ROIC?
• Firms with relatively high nonfinancial fixed costs are said to have a high degree of what?
• "One type of leverage affects both EBIT and EPS. The other type affects only EPS." Explain this statement.
• Why is the following statement true? "Other things being the same, firms with relatively stable sales are able to carry relatively high debt ratios."
The response must include a reference list. One-inch margins, double-space, Using Times New Roman 12 pnt font and APA style of writing and citations.