Chapter 18 Discussion Questions 18-1 How does the marginal principle of retained earnings relate to the returns that a stockholder may make in other investments? The marginal principle of retained earnings suggests that the corporation must do an analysis of whether the corporation or the stockholders can earn the most on fund s associated with retained earnings. Thus we must consider what the stockholders can earn on other investments 18-2 Discuss the difference between a passive and an active dividend policy a passive dividend policy suggests that dividends should be paid out if the corporation cannot make better use of the funds. We are looking more at ternate investment opportunities than at preferences for dividends. If dividends are considered as an active decision variable, stockholder preference for cash dividend s is considered very early in the decision process 18-3 How does the stockholder, in general, feel about the relevance of dividends? The stockholder would appear to consider dividends as relevant. Dividends do resolve uncertainty in the minds of investors and provide information content Some stockholders may say that the dividends are relevant, but in a different ense. Perhaps they prefer to receive little or no dividends because of the immediate income tax 18-4 Explain the relationship between a company's growth possibilities and its dividend policy The greater a company's growth possibilities, the more funds that can be justified for profitable internal reinvestment. This is very well illustrated in Table 18-1 in which we show four-year growth rates for selected U.S corporations and their associated dividend payout percentages. This is also d iscussed in the life cycle of the firm S-627 Copyright C2005 by The McGra-Hill Companies, Inc.Copyright © 2005 by The McGraw-Hill Companies, Inc. S-627 Chapter 18 Discussion Questions 18-1. How does the marginal principle of retained earnings relate to the returns that a stockholder may make in other investments? The marginal principle of retained earnings suggests that the corporation must do an analysis of whether the corporation or the stockholders can earn the most on funds associated with retained earnings. Thus, we must consider what the stockholders can earn on other investments. 18-2. Discuss the difference between a passive and an active dividend policy. A passive dividend policy suggests that dividends should be paid out if the corporation cannot make better use of the funds. We are looking more at alternate investment opportunities than at preferences for dividends. If dividends are considered as an active decision variable, stockholder preference for cash dividends is considered very early in the decision process. 18-3. How does the stockholder, in general, feel about the relevance of dividends? The stockholder would appear to consider dividends as relevant. Dividends do resolve uncertainty in the minds of investors and provide information content. Some stockholders may say that the dividends are relevant, but in a different sense. Perhaps they prefer to receive little or no dividends because of the immediate income tax. 18-4. Explain the relationship between a company's growth possibilities and its dividend policy. The greater a company's growth possibilities, the more funds that can be justified for profitable internal reinvestment. This is very well illustrated in Table 18-1 in which we show four-year growth rates for selected U.S. corporations and their associated dividend payout percentages. This is also discussed in the life cycle of the firm