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Financial Analysis: Dividend Policy

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1. Dividend Policy. Here are several assertions about typical corporate dividend policies. Which of them are true? Write out a corrected version of any false statements.

- Most companies set a target dividend payout ratio.
- They set each year's dividend equal to the target payout ratio times that year's earnings.
- Managers and investors seem more concerned with dividend changes than dividend levels.
- Managers often increase dividends temporarily when earnings are unexpectedly high for a year or two.

2. Dividend Policy. "Risky companies tend to have lower target payout ratios and more gradual adjustment rates." Explain what is meant by this statement. Why do you think it is so?

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Solution Preview

1.
- Most companies set a target dividend payout ratio.
True.

- They set each year's dividend equal to the target payout ratio times that year's earnings
False, while the manager may have a target payout ratio, it is not applied straight away. The dividends are smoothed, so in some years the payout may be different than the target, but the overall trend is to maintain the target payout.

- Managers and investors seem more ...

Solution Summary

This solution is comprised of a concise, 295 word response which explains the various assertions related to the dividend policy.

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