Respond to the required questions, double-spaced, APA format (source citations and reference insertions) essay (Each Question). In each Case Study, you must use at least three (3) references (in text), including the textbook (included below).
Textbook reference:
Berk, J. & DeMarzo, P. (2017). Corporate Finance: The Core (Fourth Edition). Boston, MA: Pearson.
Respond to the required questions, double-spaced, APA format (source citations and reference insertions) essay (Each Question). In each Case Study, you must use at least three (3) references (in text), including the textbook (included below). Textbook reference: Berk, J. & DeMarzo, P. (2017). Corporate Finance: The Core (Fourth Edition). Boston, MA: Pearson. (This Assignment Box maybe linked to Turnitin.) 150 Words: Discussion This discussion question has two parts. Respond to both parts to receive full credit for this assignment. Part 1: Why do firms choose to make large increases in their dividends or start a stock repurchase program? Why would they choose one of these payout methods over another? Part 2: Why do firms choose to cut or eliminate their dividends? What usually happens to the stock price of a company that does this? Include some news or advice from an article that is less than a year old that is applicable to this discussion. 100 Words (Lauren Tassos) – Reply and Comment on the following: The reaction of the market is consistent with the direction of the dividend change: dividend-increase (decrease) announcements are interpreted as a positive (negative) signal by the investors (Urszula & Sabina, 2017). A higher dividend would necessitate more sale of stock to raise finances for the investment program and will reduce the required rate of return and increase the firms' value. the dividend payout ratio signals information to investors about the future performance of firms. Firms that anticipate an increase in their net earnings would send signals to the market in the form of dividends. Conversely, dividend cuts send a negative message to investors about the future earnings of the company (Al-Kayed, 2017). If the firm repurchases shares instead, and shareholders sell shares to create a homemade dividend, the homemade dividend will be taxed according to the capital gains tax rate. If dividends are taxed at a higher rate than capital gains, shareholders will prefer share repurchases to dividends. Capital gains taxes are deferred until the asset is sold, there is still a tax advantage for share repurchases over dividends for long-term investors. A higher tax rate on dividends also makes it undesirable for a firm to raise funds to pay a dividend. Absent taxes and issuance costs, if a firm raises money by issuing shares and then gives that money back to shareholders as a dividend, shareholders get back the money they put in (Berk & DeMarzo,2017). If the firm lowers the current dividend and repurchases its shares, it will have fewer shares in the future, so it will be able to pay a higher dividend per share. The net effect of this trade-off is to leave the total present value of all future dividends, and hence the current share price, unchanged (Berk & DeMarzo,2016). 100 Words (Stacy Campos) – Reply and Comment on the following: Firms have a choice between the following payout methods to its shareholders: paying dividends or a stock repurchase program. Dividends are determined by a public company’s Board of Directors. The Board has the ability to set the amount per share that will be paid and when it will be paid. Most companies that pay dividends, pay them in quarterly intervals and they adjust the amount of the dividends steadily. Seldom may a company pay a one-time special dividend that is much larger than its regular dividend amount. A stock repurchase program is another way that firms pay cash to its investors. In this case, the firm uses the cash to buy shares of its own outstanding stock. Stock repurchase programs can be done in three ways: open market repurchase, tender offer, and targeted repurchase. Each of these repurchase transactions end the same, but the process in doing so, varies (Berk & DeMarzo). A firm would choose one payout method over another depending on what the company is willing to trade off. Firstly, the firm can either pay the set dividend now, which would mean that the shareholders are getting paid consistently. Secondly, they can wait to pay the shareholders an increased dividend, but this would mean that the firm has to get more cash to do this. They could do this by holding off on their investments, borrowing money, or selling new shares. This would take some time, which is what the firm has to decide if they can afford to do that. Thirdly, they can repurchase shares and not pay dividends to the shareholders. By not paying a dividend today and repurchasing shares instead, the firm is able to raise its dividends per share in the future. So essentially it is up to the firm and Board of what payout method is best suited for their needs. Firms choose to cut or eliminate their dividends because they are looking to cut costs and reduce their debt. A perfect example is the current global pandemic. The global economy is taking a hard hit and companies are looking to eliminate their dividends to preserve their liquidity. Eliminating dividends provides the company with a sense of security during a time where there is so much uncertainty. Companies such as General Motors, Dick’s Sporting Goods, Estee Lauder, and much more have suspended their dividends due to the damage inflicted by COVID-19 (Fox, 2020). However, as a result of cutting or eliminating dividends, the stock price of the company can fall because investors are nervous of the financial outcome of the situation, which causes them to sell their shares. Investors have grown used to ever-increasing dividend payments and stock buyback programs over the past decade. But as companies reassess their balance sheets and try to strengthen them in response to the coronavirus pandemic, dividends and stock buybacks could be the first thing companies cut (Vigna, 2020). Respond to the required questions, double-spaced, APA format (source citations and reference insertions) essay (Each Question). In each Case Study, you must use at least three (3) references (in text), including the textbook (included below). Textbook reference: Berk, J. & DeMarzo, P. (2017). Corporate Finance: The Core (Fourth Edition). Boston, MA: Pearson. (This Assignment Box maybe linked to Turnitin.) 150 Words: Discussion This discussion question has two parts. Respond to both parts to receive full credit for this assignment. Part 1: Why do firms choose to make large increases in their dividends or start a stock repurchase program? Why would they choose one of these payout methods over another? Part 2: Why do firms choose to cut or eliminate their dividends? What usually happens to the stock price of a company that does this? Include some news or advice from an article that is less than a year old that is applicable to this discussion. 100 Words (Lauren Tassos) – Reply and Comment on the following: The reaction of the market is consistent with the direction of the dividend change: dividend-increase (decrease) announcements are interpreted as a positive (negative) signal by the investors (Urszula & Sabina, 2017). A higher dividend would necessitate more sale of stock to raise finances for the investment program and will reduce the required rate of return and increase the firms' value. the dividend payout ratio signals information to investors about the future performance of firms. Firms that anticipate an increase in their net earnings would send signals to the market in the form of dividends. Conversely, dividend cuts send a negative message to investors about the future earnings of the company (Al-Kayed, 2017). If the firm repurchases shares instead, and shareholders sell shares to create a homemade dividend, the homemade dividend will be taxed according to the capital gains tax rate. If dividends are taxed at a higher rate than capital gains, shareholders will prefer share repurchases to dividends. Capital gains taxes are deferred until the asset is sold, there is still a tax advantage for share repurchases over dividends for long-term investors. A higher tax rate on dividends also makes it undesirable for a firm to raise funds to pay a dividend. Absent taxes and issuance costs, if a firm raises money by issuing shares and then gives that money back to shareholders as a dividend, shareholders get back the money they put in (Berk & DeMarzo,2017). If the firm lowers the current dividend and repurchases its shares, it will have fewer shares in the future, so it will be able to pay a higher dividend per share. The net effect of this trade-off is to leave the total present value of all future dividends, and hence the current share price, unchanged (Berk & DeMarzo,2016). 100 Words (Stacy Campos) – Reply and Comment on the following: Firms have a choice between the following payout methods to its shareholders: paying dividends or a stock repurchase program. Dividends are determined by a public company’s Board of Directors. The Board has the ability to set the amount per share that will be paid and when it will be paid. Most companies that pay dividends, pay them in quarterly intervals and they adjust the amount of the dividends steadily. Seldom may a company pay a one-time special dividend that is much larger than its regular dividend amount. A stock repurchase program is another way that firms pay cash to its investors. In this case, the firm uses the cash to buy shares of its own outstanding stock. Stock repurchase programs can be done in three ways: open market repurchase, tender offer, and targeted repurchase. Each of these repurchase transactions end the same, but the process in doing so, varies (Berk & DeMarzo). A firm would choose one payout method over another depending on what the company is willing to trade off. Firstly, the firm can either pay the set dividend now, which would mean that the shareholders are getting paid consistently. Secondly, they can wait to pay the shareholders an increased dividend, but this would mean that the firm has to get more cash to do this. They could do this by holding off on their investments, borrowing money, or selling new shares. This would take some time, which is what the firm has to decide if they can afford to do that. Thirdly, they can repurchase shares and not pay dividends to the shareholders. By not paying a dividend today and repurchasing shares instead, the firm is able to raise its dividends per share in the future. So essentially it is up to the firm and Board of what payout method is best suited for their needs. Firms choose to cut or eliminate their dividends because they are looking to cut costs and reduce their debt. A perfect example is the current global pandemic. The global economy is