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    HW Assignment For Week 8

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    Lưu Gia Bảo
    Student Luu Gia Bao submitted homework for Week 8 that included answers to 4 questions: 1) A line on a graph initially slopes upward but then slopes downward due to reduced bankruptcy costs that decrease the tax benefits of debt at an increasing rate. 2) Cutting dividends can sometimes be a positive signal as it allows a company to pursue growth opportunities rather than distribute dividends. 3) There is an inverse relationship between dividends and growth potential because higher dividends limit opportunities for reinvestment and growth. 4) Dividends are less risky than growth because they guarantee investors receive a return, unlike growth opportunities whose returns are uncertain.

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    HW Assignment For Week 8

    Uploaded by

    Lưu Gia Bảo
    105 views2 pages
    Student Luu Gia Bao submitted homework for Week 8 that included answers to 4 questions: 1) A line on a graph initially slopes upward but then slopes downward due to reduced bankruptcy costs that decrease the tax benefits of debt at an increasing rate. 2) Cutting dividends can sometimes be a positive signal as it allows a company to pursue growth opportunities rather than distribute dividends. 3) There is an inverse relationship between dividends and growth potential because higher dividends limit opportunities for reinvestment and growth. 4) Dividends are less risky than growth because they guarantee investors receive a return, unlike growth opportunities whose returns are uncertain.

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    BaoLuuHW8

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    Student Luu Gia Bao submitted homework for Week 8 that included answers to 4 questions: 1) A line on a graph initially slopes upward but then slopes downward due to reduced bankruptcy costs that decrease the tax benefits of debt at an increasing rate. 2) Cutting dividends can sometimes be a positive signal as it allows a company to pursue growth opportunities rather than distribute dividends. 3) There is an inverse relationship between dividends and growth potential because higher dividends limit opportunities for reinvestment and growth. 4) Dividends are less risky than growth because they guarantee investors receive a return, unlike growth opportunities whose returns are uncertain.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    105 views2 pages

    HW Assignment For Week 8

    Uploaded by

    Lưu Gia Bảo
    Student Luu Gia Bao submitted homework for Week 8 that included answers to 4 questions: 1) A line on a graph initially slopes upward but then slopes downward due to reduced bankruptcy costs that decrease the tax benefits of debt at an increasing rate. 2) Cutting dividends can sometimes be a positive signal as it allows a company to pursue growth opportunities rather than distribute dividends. 3) There is an inverse relationship between dividends and growth potential because higher dividends limit opportunities for reinvestment and growth. 4) Dividends are less risky than growth because they guarantee investors receive a return, unlike growth opportunities whose returns are uncertain.

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    Student Name: Luu Gia Bao

    Student ID: 1567033

    HW Assignment for Week 8:

    Question 1:
    Please refer to the curved line in figure 14.8 on page 499 and explain the reason for the
    following: The line initially has an upward slope, but gradually begins to slope downward as you
    move further out along the horizontal axis.
    Answer:
    The line initially has an upward slope but then begins to gradually go down because the value
    reduced bankruptcy –related costs affects the slope. Reduced bankruptcy related cost reduce the tax
    benefits of debt at an increasing rate. From looking at the diagram, it also seems that since the blue
    sloped line is under the horizontal green line that the firm used no financial leveraged.
    Because interest paid is a deductible expense, a company’s debt is less expensive than common
    or preferred stock. This means that a company with 15% debt is much more valuable than a
    company with 0% debt, even if they have similar assets., because debt is considered as a good
    thing.
    However, the higher the company’s debt ratio, the higher chances for this company to go
    bankruptcy. When the risk of bankruptcy are high, the company will incur many forms of
    bankruptcy-related costs. As a result, the bankruptcy-related costs outweigh the tax benefits of
    debt, then the line begins slowing in its ascent and then eventually descending. It will lead to a
    lower price of this company stock.
    Question 2:
    Please explain the following statement: There are times when a cut in dividends can be a positive
    signal.
    Answer:
    A cut in dividends totally can be a positive signal for a company because it can indicate that the
    company has a good investment opportunity. When a company pay out higher dividends, it’s
    hindered by less opportunity for growth. A cut in dividend can help the company to get better
    return on the dividends that have already been given oppose to distributing more. There are some
    situations that the company should cut off the dividend. For example, when the company
    overcame a great recession or when the company needs to accumulate a huge amount cash in
    hand for a merger of acquisition. Cutting dividend is also good for the investors because it can
    potentially allow prices to go down which means the dividend yield will be higher that is good
    for those investors who choose to wait to buy
    Question 3:
    Consider the Dividend Irrelevance Theory and explain the following: Generally speaking, why is
    there an inverse relationship between dividends and the potential for growth?
    Answer:
    When a company is paying out higher dividends, it’s hindered by less opportunity for growth so
    it will be an inverse relationship between dividends and the potential for growth. If there would
    have been higher visibility of growth the company would not give out dividends and would
    retain them for consumption in investment opportunities which can generate superior return.
    Also, lower or no dividends means the company has better growth opportunities in hand and
    consequently is declaring less dividends.
    Question 4:
    Consider the Bird in the Hand Theory and explain the following: Why are dividends less risky
    than pursuing growth opportunities?
    Answer:

    Dividends are less risky than pursuing growth opportunities because by paying dividends, the
    company is guaranteeing that the investors have received at least some return. Furthermore, the
    investors are less certain about future capital gain from growth and reinvestment of retain
    earning than they are from receiving current dividend payment. Paying dividends confirms for
    the company that the shareholder has definitely been satisfied, and this cannot be taken away
    even if the company encounters turbulence.

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