One of your friends shows you an article from the December 9th, 1997 New Journal describing recent activities in the utility industry.  The article notes that utilities, "... typically borrow heavily to finance power stations ... ." The article goes on to claim that the recent introduction of competition into the utility industry, "... may force utilities to cut back on dividend payouts."  Your friend says he thinks that makes sense and asks what you think.  What do you say?

A co-worker shows you an article from the Wall Street Journal (November 5th, 1997) which states that dividends for utility companies may be decreasing because of deregulation.  He tells you that the reason for the dividend reduction is because unregulated firms are not required to pay as high a dividend, and that the money grubbing managers will increase their salaries with the extra cash. What do you think of your co-workers analysis?

You work for small consumer products company that currently has many new products under development.  Your boss just read an article in the Wall Street Journal detailing First Brands Corp.'s recent 25% increase in quarterly dividends.  Your boss suggests that you could boost your company's stagnating stock price by increasing your dividend to convey to the market that you have "strong prospects for long-term growth."  What do you say?

Your boss shows you an article from the News Journal detailing how a particular firm's stock price has increased eventhough it just reported it fifth straight quarterly loss.  The firm, Cephalon, is a young biotechnology firm that is coming up with new treatments for afflictions such as Lou Gehrig's disease.  He suggests that the market is "clearly inefficient," because your firm has produce stable earnings over the same time period, but has suffered a decline in value.  What do you think of his suggestion.  As an aside, he says that he's concerned about you stock's recent poor performance and asks you if there is any change you could make to dividend policy that might have a positive effect on firm value.  What do you say?

Your boss shows you an article from the October 29th, 1997 Wall Street Journal titled, "IBM Plans $3.5 Billion Share Repurchase ... Many Others Follow as Stock Prices Tumbled."  He says that you company should repurchase their own shares instead of paying dividends this quarter.  He suggests that doing so will increase the price of your stock.  What do you think of your bosses recommendation?

You have a friend that's going through an MBA program at another school. Your friend gives you a call and says that he's reading Easterbrook (1984), "Two Agency-Cost Explanations of Dividends," for class and he's come across a line that he doesn't understand. He quotes from the article, "Financing projects out of retained earnings - if unanticipated by bondholders - transfers wealth from shareholders to debtholders." He says that his firm is considering financing a new investment project out of retained earnings and that his firm has debt in its capital structure. He says that he's a little worried about that given this quote. He asks you to explain Easterbrook's statement. What do you say?

Your boss, who's currently going through an executive development program, shows you an academic article that he's been reading. The article, Dann (1980), finds that when firms announce that they will repurchase shares via an intra-firm tender offer, their stock prices rise, on average, 15%. Your boss asks you why the price would rise like that? What different explanations do you offer him? After hearing your explanations, your boss tells you that Dann also found that the value of the firms' convertible securities went up, but that the value of the straight debt was unaffected. He asks if that helps discern between (among) the alternative explanations that you offered? What do you say?

Brickley, in his 1983 examination of specially designated dividends, ran the following regression on a sample of regular dividend increases and specially designated dividend increases (with the results as shown):

RET2D = 0.99 + 0.016 REGINC + 0.048 SZREL

where RET2D is the two-day return at announcement of the dividend, REGINC=1 if the observation is a regular dividend increase and REGINC=0 if the observation is a specially designated dividend, SZREL is the specially designated dividend increase or regular dividend increase divided by the regular dividend declared in the previous quarter. The coefficients on REGINC and SZREL were both statisticallly significant. What does the statistically significant (positive) coefficient on SZREL tell us? Can you explain why the coefficient on REGINC is positive and statistically significant?

Discuss the extent to which the following two statements are consistent with each other: A firm's equity value is equal to the present value of its expected future dividends. The value of a firm is independent of its dividend policy.

Your boss shows you an article from the WSJ on 2/26/97 titled, "Ipalco May Draw Utility Imitators With Stock Buyback, Payout Cut."  The article details Ipalco's decision to cut its dividend while at the same time initiating a program to buy back shares.  The article goes on further to say, "The entire [utility] industry has struggled with the problem of how best to bring its average 80% payout ratios in line with the 41% average of Standard & Poor's 500-stock index."  You boss says, "I think this sounds like a good way of doing it."  What do you think of his analysis?

Your boss shows you an article from the WSJ (1/22/97) detailing Tandem Computers' announcement of a program to buyback $50 million of its shares.  Tandem's stock rose 8.6% on the announcement of the buyback program.  Your boss argues that your company should initiate a buyback program to prop up the company's stock price.  What do you think about her suggestion?

Your boss shows you an article from the January 20th, 1997 News Journal.  The article notes that, "profits used to pay dividends are taxed twice: when they're declared by the corporation, and again when they're paid to investors."  "No wonder many strong companies prefer to invest that cash -- even in their own stock -- instead of paying it out."  Your boss argues that your company should give up paying a dividend to avoid double taxation and just "invest" the money in buying your own company's shares.  What do you think about his proposal?

[CSW] On average firms pay out too little to shareholders -- hence stock prices rise with payout increases and fall with payout decreases.

[CSW]  The buy-back of shares at a premium undercuts the bondholders -- directors are being urged to protect their interests.  Comment.