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Finance Revision – Dividends, Capital Structure, Forex, Options Finance - Revision Exercise – Dividends, Capital Structure, Forex, Options 1. Explain the following terms (a) passive residual theory of dividends (b) clientele effect (c) signalling effects (d) ‘bird-in-the-hand’ view 2. The decision over how much to payout and how much of earnings to retain is a key decision for managers. Identify and discuss the important factors that management should consider when deciding on the size of dividend to be paid to investors. 3. Three old lags from business school meet up to spoil a good walk by playing a round of golf. During the game they discuss the profitable companies they now run. The conversation drifts towards dividend policy… Boss A says his dividend policy is to pay no dividends at all . Boss B says that he always pays a dividend of 50% of earnings after tax. Boss C says that she maintains a low but constant dividend per share, offers scrip dividends, and shareholder perks. One of the companies is a tech company, one is a utility. Discuss the advantages and disadvantages of the alternative dividend policies. Which boss runs the tech company, the utility, and which sector would you think the other company might come from (for the third company - more of a judgement call)? Which type of shareholder would be attracted to these companies? 4. What are the agency concerns surrounding the dividend decision? 5. Do flotation costs favour high dividends or low dividends – discuss. 6. When using debt and equity weights to calculate the wacc, do we use book values or market values, and explain why. 7. The majority of high growth companies do not use debt to finance new projects, but some do. Which type of high growth company would be more likely to use debt than equity to finance expansion? src.doc 1- Finance Revision – Dividends, Capital Structure, Forex, Options 8. (a) What are the direct costs of bankruptcy? What are the indirect costs of bankruptc

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