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# Finance/Accounting Problems: Dividend Policy

20. 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.

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

21. Dividend Policy. For each of the following four groups of companies, state whether you would expect them to distribute a relatively high or low proportion of current earnings and whether you would expect them to have a relatively high or low price-earnings ratio.
1. High-risk companies.
2. Companies that have recently experienced a temporary decline in profits.
3. Companies that expect to experience a decline in profits.
4. Growth" companies with valuable future investment opportunities.

22. 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?

#### Solution Preview

20.

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.

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

1 Most companies set a target dividend payout ratio.

TRUE

Studies by Lintner and Fama suggest that most companies adjust their payout ratios towards ideal or target payout ratios.

2 They set each year's dividend equal to the target payout ratio times that year's earnings.

TRUE

Dividend Payout Ratio = Dividends / Earnings
Or Dividends= Dividend ...

#### Solution Summary

The solution looks at dividend policy of different companies. "Risky companies tend to have lower target payout ratios and more gradual adjustment rates." is explained.

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