Concept Checks

10.1: False
A company with volatile or cyclical earnings may more than 100% of earnings as dividends in a year when earnings are depressed. Some firms may consistently pay out more than 100% of earnings if they are trying to shrink in size.

10.2: A pharmaceutical firm, whose earnings have increased steadily over the last five years, due to a successful drug
The earnings increases for the other two firms are less likely to be viewed as sustainable in the long term.

10.3: No change in dividend policy and an increase in the cash balance
This is not what I would like to see. I would prefer that they return the cash to the stockholders.

10.4: Higher portion of earnings will be paid out in dividends and dividends will be more volatile.
Without the option of stock buybacks, companies will pay out more in dividends and backtrack more (change dividends) as a consequence.

10.5: Large companies with significant holdings by pension funds and minimal reinvestment needs.
These are the firms where the Miller-Modigliani assumptions (no flotation costs, no tax effects)

10.6: dividends have a tax advantage relative to capital gains
The tax rate on dividends is only 10.8% (.36 * .3), while the tax rate on capital gains is 20%.

10.7: Stocks that pay high dividends
They have no tax disadvantages, and the dividends cover the cash needs.

10.8: Something else (One idea: spin off the media business, and allow it to pay no dividends)
While cutting dividends may be the courageous thing to do, the existing investors in the firm probably like dividends.

10.9: the stock price to go down
This is a case where the dividend initiation to be viewed as a signal of fewer investment opportunities.

10.10: to be lower than dividends paid by similar companies in other countries
Managers left to themselves like to hold on to cash.