1. Payout policy in perfect capital markets Respond to the following comment: “It’s all very well saying that I can sell shares to cover cash needs, but that may mean selling at the bottom of the market. If the company pays a regular cash dividend, investors avoid that risk
2. Payout policy in perfect capital markets Here are key financial data for House of Herring Inc.:
House of Herring plans to pay the entire dividend early in January 2026. All corporate and personal taxes were repealed in 2024.
a. Other things equal, what will be House of Herring’s stock price after the planned dividend payout?
b. Suppose the company cancels the dividend and announces that it will use the money saved to repurchase shares. What happens to the stock price on the announcement date? Assume that investors learn nothing about the company’s prospects from the announcement. How many shares will the company need to repurchase?
c. Suppose that, instead of canceling the dividend, the company increases dividends to $5.50 per share and then issues new shares to recoup the extra cash paid out as dividends. What happens to the with- and ex-dividend share prices? How many shares will need to be issued? Again, assume investors learn nothing from the announcement about House of Herring’s prospects.