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ShortAnswerQuestions72.Explainwhy,asafunctionofthedebt-equityratio,thecostofdebtgraphisconcaveathighlevelsofdebt.Asafirmtakesonhigherlevelsofdebt,theriskofdefaultincreases.Defaultriskrequiresariskpremiumfordebtinvestors.Thus,equityinvestorsareshiftingrisktothedebtholders.Type:Difficult73.Statethelawofconservationofvalue.Thelawofconservationofvaluestatesthatthevalueofanassetispreservedregardlessofthenatureofclaimsagainstit.Type:Medium75.Brieflydiscusssomeoftheapplicationsofthelawofconservationofvalue.Thelawofconservationofvaluecanbeappliedtothechoiceofvarioussecuritiesissuedbyafirm.Forexample,wecouldapplythelawofconservationofvaluetothechoicebetweenissuingpreferredstock,commonstock,orsomecombinationofthetwo.Thelawimpliesthatthechoiceisirrelevant,assumingperfectcapitalmarkets,andthatthechoicedoesnotaffectthefirm'sinvestment,borrowing,andoperatingpolicies.Thelawalsoappliestothemixofdebtsecuritiesissuedbythefirm.Thechoicesoflong-termversusshort-term,securedversusunsecured,seniorversussubordinated,andconvertibleandnonconvertibledebtallshouldnothaveanyeffectontheoverallvalueofthefirm.Type:Difficult79.Brieflydescribethetraditionalists'positiononcapitalstructure.Thetraditionalviewofdebtpolicystatesthatmoderateamountsofdebtincreasetheexpectedreturnonequity,butnotasfastasproposedbyM&M.Therefore,theweightedaveragecostofcapitaldeclinesinitiallyatlowlevelsofdebtandlaterincreasesathigherlevelsofdebt.Athighlevelsofdebt,therateofreturnincreasesataratefasterthanthatproposedbyM&M.Hence,thereisanoptimalcapitalstructureforafirmlyingbetweenthesetwosituations.Type:MediumEssayQuestions60.Brieflydescribethesequenceofeventsofafirm'sdividendpayment.Theboardofdirectorssetsthedividendforafirm.Thedateonwhichtheboardofdirectorsannouncesthedividendiscalledthedeclarationdate.Dividendswillbepaidtothosewhoareregisteredshareholdersasoftherecorddate.Twobusinessdayspriortotherecorddateistheex-dividenddate.Sharesboughtontheex-dividenddateorlaterdonotcomewiththedividend.Dividendchecksaremailedtoshareholdersonthepaymentdate.Type:Easy61.WhatisSECRule10b-18?SECRule10b-18wasadoptedin1982.Priortoadoptionofthisrule,firmsthatrepurchasedtheirshareswereliableforprosecutionformanipulatingtheirshareprice.SECRule10b-18hasprovisionsthatprotectfirmsagainstsuchprosecution.Type:Medium62.Brieflydiscussdifferentwaysinwhichafirmcanpaydividendstoitsshareholders.Firmsthatpaydividendstypicallypayaregularcashdividendeachquarter.Occasionally,firmspayextraorspecialdividends.Occasionally,firmsdeclarestockdividends.Thatis,shareholdersreceiveadditionalsharesofstockinsteadofcash.Manytimesfirmsmightrepurchasetheirownstock.Thisisinlieuofpayingdividends.Type:Easy63.Whatinformationdoesasharerepurchaseconveytoinvestors?Firmsrepurchaseshareswhentheyhaveaccumulatedcashthattheyarenotabletoinvestprofitably.Sharerepurchasesmayindicateanunderpricedstock.Sharerepurchasemayalsobeusedtosignalmanagement'sconfidenceinthefutureofthefirm.65.Rightistsarguethatincreasingafirm'sdividendwillincreaseitsvalue.Reviewsomeofthekeypointsintheirassertion.Investorsprefercashtocapitalgainsascashdividendsarecertainandcapitalgainsareuncertain;manyinvestorsprefercash,astheyneeditforlivingexpenses;investorsseetheinformationcontainedwithindividendpaymentsasobjectiveevidenceofafirm'sgoodperformance.Type:Difficult66.Brieflydescribetheleftists'pointofviewondividendsandtaxes.Ifdividendsaretaxedatahigherratethancapitalgains,firmsshouldpaythelowestcashdividends.Byshiftingtheirdistributionpolicy,corporationscantransformdividendsintocapitalgains.Leftistsfavorlowdividendpayouts.Type:Medium67.Brieflydescribehowcurrenttaxlawsfavorcapitalgains.Thecurrent(2012)taxrateonlong-termcapitalgainsis20%,whilemarginalratesforinvestorsareusuallymuchhigher.Taxlawsalsofavorcapitalgainsbecausecapitalgainstaxesaredeferreduntilthestockissold,atwhichpointthegainisrealized.Taxesondividendshavetobepaidimmediately.Thelongertheshareholdersdefercapitalgains,thelessthepresentvalueofcapitalgainsliability.Type:Medium68.Brieflydescribethemiddle-of-the-roaders'positionondividendpolicy.Middle-of-the-roadersholdthatafirm'svalueisnotaffectedbyitsdividendpolicy.Type:Easy69.Brieflyexplainhowshareholders'returnsaretaxedtwiceintheUnitedStates.Shareholders'returnsaretaxedatthecorporatelevelascorporatetax.Distributionsoftheremainingearningsaretaxedasecondtimeattheshareholders'levelaseithertaxondividendstaxorascapitalgainstax.Type:Easy70.Brieflydescribeanimputationtaxsystem.Inanimputationtaxsystem,shareholdersaretaxedondividends,buttheyreceiveataxdeduction,whichisequaltotheirshareofthecorporatetaxthatthecompanyhaspaid.ThisisfollowedinAustralia.Type:Medium71.BrieflyexplainhowshareholdersaretaxedtwiceintheU.S.byprovidinganexample.Type:Difficult72.BrieflyexplainhowtheimputationtaxsystemworksinAustraliabyprovidinganexample.Assumea30%corporatetaxrateanda15%marginaltaxratefortheinvestor.Type:Difficult73.Aretireebelievesthatinvestinginanondividendpayinggrowthfirm,whichrequirestheperiodicsaleofstockforincome,willeventuallyleadtoalossofallshares.Explaintheflawinthis