Willows Corporation Is Experiencing High Demand for Its Products and High

question 151

Multiple Choice

Willows Corporation is experiencing high demand for its products and high growth rates.The company just reported earnings per share of $5 for the most recent year and has many positive NPV projects to fund.One vice president wants to pay a dividend of $5 per share,arguing that this will maximize shareholder value.You argue that a much smaller dividend will maximize value.Your argument may be based on

• A) the bird-in-the-hand theory.
• B) the residual dividend theory.
• C) the information effect.
• D) the very high agency costs of the corporation.

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Definitions:

Endowment Effect

The cognitive bias causing individuals to ascribe higher value to things merely because they own them.

Loss Aversion

A psychological principle suggesting people tend to prefer avoiding losses to acquiring equivalent gains.

Military Time

A timekeeping system that runs from midnight to midnight, displayed in a 24-hour format, to avoid ambiguity.

Documenting

The process of recording information systematically and accurately for the purpose of communication, compliance, and record-keeping.