Options And Corporate Finance Essay

In a perfect world, the dribble price entrust push down by the fall of the special one- m dividend on the ex-dividend date. If we ignore taxes as we do in this mini- guinea pig the wealthiness of the sh atomic number 18holders doesnt change if the friendship pays a special one-time dividend or not because it is reflected in the stock price. As we also saw in rank that a dividend policy for a friendship is irrelevant since investors can commute share to cash or create their own homemade dividends payments if they select an income stream. In essence, paying the dividend is transferring money from the come with to the shareholders but net the wealth of the shareholder stay the same due to a similar drop in the share price, but the prise of the party leave reduce.2. The device of Jessica could go both ways, it could enlarge the determine of the company or fall down the take to be, for the simple reason that we dont have any breeding about(predicate) leverage, the amount of debt, capital structure etc. If the company is overleveraged that pass on expiry in extra costs of financial inconvenience, which consist of direct, corroborative and agency costs. An overleveraged company goes past the optimal point and will decrease in evaluate as you can see from the red line. If this is the case then it would be a good idea to reduce the amount of debt which results in a reduction of costs related to financial distress and invest the money in new facilities to increase the overall value of the company. If the company didnt reach it equilibrium point than it would be a bad idea to reduce the amount of debt because it will decrease the value of the company due to the tax advantages (tax shield), so it would be founder to clench the amount of debt to and maybe even increase the debt to reach the maximum company value. This are two options which can increase or decrease the value of the company. Another point could be that we dont k promptly about future prospect of the current technology and if there is enough demand, and if they now use their full production capacity. If not the case then it would be a bad idea to upgrade and billow, but it would be better to invest in research for new technology.3. Nolan is correct in the hotshot that all three indicators will increase due to share repurchase. It will increase the P/E ratio because there are less(prenominal) shares available and it will reduce the denominator of both ROA and ROE which will result in an increase in both ratios. However, a share repurchase will not have any effect on the value of the company for the reasons we discussed in question 1, which is that the dividend policy is irrelevant to the value of the company and it wont have any effect on the wealth of shareholders.4. When a company starts with a dividend policy it gives a signal to the shareholders/investors that they are committed to distribute part of their income to their shareholders. If they would s tart with regular dividend payments they should be trustworthy that they are able to continue that forever, because a reduction in dividend or if they stop paying dividend at all at a after stage will send a negative signal to the foodstuff and shareholders/investors. So, they need to make sure that they have enough cash to curb the dividend policy going. To come back to the question, I would evaluate it regarding the companys ability to pay the dividend for an infinite time period and I they will have enough cash in the future or convey enough cash in the future to pay the dividends.5. If the company wants to expand (and it is able to do so) the trade-off is discredit dividends to their shareholders than when they are a right company who has no growth potential than they would pay dividend. The implications of the formula are that the company should make a trade-off/decision between company growth or pay the dividend to its shareholders. To please its shareholders and to maxi mize the companys value, the company should deliver the required set out of return which is valued by the shareholders or deliver a higher return to make the shareholders happy. If the company can have a higher rate of return than wanted by the shareholders it should retain earnings to invest in the growth to increase the rate of return, when this is not possible it should pay the shareholders their dividend to give them their required rate of return. But if the company retain its earnings when the rate of return is lower than wanted by the shareholders it lowers the companys value.