You must show your work to receive full credit. question 1. A firm has had the i

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You must show your work to receive full credit.

question 1.

A firm has had the indicated earnings per share over the last three years: (a) If the firm's dividend policy was based on a constant payout ratio of 50 percent, determine the annual dividend for each year. (b) If the firm's dividend policy was based on a fixed dollar payout policy of 50 cents per share plus an extra dividend equal to 75 percent of earnings per share above $1.00, determine the annual dividend for each year.

• Question 2.

How does asymmetric information affect the firm’s capital structure decisions? How do the firm’s financing actions give investors signals that reflect management’s view of stock value?

Explanation / Answer

QUESTION 1. IS NOT COMPLETE EARNING PER SHARE IS NOT MENTIONED

(a) LET THE EARNING PER SHARE BE =$10

PAYOUT RATIO=50%

ANNUAL DIVIDEND=$10*505=$5 PER SHARE

(b) DIVIDEND=50% OF EARNING PER SHARE+75%OF EARNING PER SHARE ABOVE $1

=$10*50%+($10-$1)*75%

=$5+$6.75

=$11.75

QUESTION 2.ASYMMETRIC INFORMATION: A situation in which one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well.in the present case it would be said to be assymetric information if firm has information that investors do not have. Potentially, this could be a harmful situation because one party can take advantage of the other party's lack of knowledge.

Management is assumed to know more about the firm's value than potential investors. Investors interpret the firm's actions rationally. An equilibrium model of the issue-invest decision is developed under these assumptions.

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