What is the difference between a stock dividend and a stock split?


How would each of the following changes tend to affect aggregate payout ratios (that is, the average for all corporations), other things held constant? Explain your answers.

a.   An increase in the personal income tax rate

b.   A liberalization of depreciation for federal income tax purposes—that is, faster tax write-offs

c.   A rise in interest rates

d.   An increase in corporate profits




Define each of the following terms:

a.   Optimal distribution policy

b.   Dividend irrelevance theory; bird-in-the-hand theory; tax effect theory

c.   Signaling hypothesis; clientele effect

d.   Residual distribution model; extra dividend

e.   Declaration date; holder-of-record date; ex-dividend date; payment date

f.    Dividend reinvestment plan (DRIP)

g.   Stock split; stock dividend; stock repurchase



Indicate whether the following statements are true or false. If the statement is false, explain why.

a.   If a firm repurchases its stock in the open market, the shareholders who tender the stock are subject to capital gains taxes.

b.   If you own 100 shares in a company’s stock and the company’s stock splits 2-for-1, then you will own 200 shares in the company following the split.

c.   Some dividend reinvestment plans increase the amount of equity capital available to the firm.


One position expressed in the financial literature is that firms set their dividends as a residual after using income to support new investments. Explain what a residual policy implies (assuming that all distributions are in the form of dividends), illustrating your answer with a table showing how different investment opportunities could lead to different dividend payout ratios.

  1. Permission for corporations to deduct dividends for tax purposes as they now do interest charges
  2. A change in the Tax Code so that both realized and unrealized capital gains

in any year were taxed at the same rate as dividends


What is the difference between a stock dividend and a stock split? As a stockholder, would you prefer to see your company declare a 100% stock dividend or a 2-for-1 split? Assume that either action is feasible.