Last updated: 24/10/2025 16:11
The questions are based on or inspired by the following references:
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📙 Part 2 (Midterm to Final)
Answer the following questions based on the discussions in class.
Q1.
Explain Modigliani and Miller’s argument for the irrelevance of dividend policy in perfect capital markets. How can investors use homemade dividends to replicate any payout policy, and why might this result fail in real markets?
Q2.
Discuss how differences between the tax rates on dividends and capital gains affect a firm’s optimal payout policy. In your answer, explain the concept of the effective dividend tax rate (\(\tau^*_d\) ) and how it shapes investor preferences for dividends versus share repurchases.
Q3.
Analyze the trade-off between retaining excess cash and distributing it to shareholders. Include in your discussion how taxes, issuance costs, and agency problems influence this decision, and provide an example where retaining cash might increase firm value.
Q4.
Describe the dividend signaling hypothesis and discuss why dividend changes can strongly affect stock prices. Why do managers prefer to smooth dividends over time, and what information might both increases and cuts convey to investors?
Q5.
Compare the effects of a stock split, an inplit (reverse split), and a spin-off on shareholder value. Explain how each transaction affects the number of shares, share price, and total market capitalization, and discuss the strategic motivations for each.