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Chapter 5: Q2DQ (page 593)

Discuss the difference between a passive and an active dividend policy?

Short Answer

Expert verified

The passive dividend policy states that the company will pay dividend after analysing alternative investing options, whereas, the active policy states that the company will pay regular dividends.

Step by step solution

01

Step 1:Meaning of dividend policy

The dividend policy refers to the company鈥檚 policy regarding the dividend pay-out.This policy is designed by the management and states the manner of distributing the dividends to the stockholders.

02

Difference between passive and active dividend policy

The active dividend policy states that the company will pay regular dividends to its shareholders.In this policy, the company will pay dividends, even if they exceed the money set aside for investment.

The passive dividend policy states that the company will pay the dividends if they cannot utilize the funds in a better manner.This policy suggests that the company will analyse alternate investment options before paying the dividend.

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Most popular questions from this chapter

In what way is an investment banker a risk taker?

Question: The Bowman Corporation has a \(18 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.5 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new \)18,000,000 issue is \(530,000, and the underwriting cost on the old issue was \)380,000. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision.

c. Calculate the net present value.

An investor must choose between two bonds: Bond A pays \(72 annual interest and has a market value of \)925. It has 10 years to maturity. Bond B pays \(62annual interest and has a market value of \)910. It has two years to maturity.

Assume the par value of the bonds is $1,000.

a.Compute the current yield on both bonds.

b.Which bond should she select based on your answer to part a?

c.A drawback of current yield is that it does not consider the total life of thebond. For example, the yield to maturity on Bond A is 8.33 percent. What isthe yield to maturity on Bond B?

d.Has your answer changed between parts band cof this question in terms ofwhich bond to select?

How does the bond rating affect the interest rate paid by a corporation on its bonds?

Why has corporate management become increasingly sensitive to the desires of large institutional investors?
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