Question 1

If dividends are taxed more heavily than capital gains, then investors

Accepted Answer

A) should be willing to pay more for stocks with low dividend yields. 
B) should be willing to pay more for stocks with high dividend yields. 
C) should be willing to pay the same for stocks regardless of their dividend yields. 
D) should be willing to pay more for stocks having infrequent share repurchases. 
A) should be willing to pay more for stocks with low dividend yields. 
B) should be willing to pay more for stocks with high dividend yields. 
C) should be willing to pay the same for stocks regardless of their dividend yields. 
D) should be willing to pay more for stocks having infrequent share repurchases.

Question 2

What is the likely impact on a typical individual investor if a firm undertakes a stock repurchase in lieu of a cash dividend?

Accepted Answer

A) Lower income taxes, if capital gains tax rates are less than dividend tax rates 
B) Higher income taxes, if capital gains tax rates are less than dividend tax rates 
C) Lower share price 
D) A tax-free transaction 
A) Lower income taxes, if capital gains tax rates are less than dividend tax rates 
B) Higher income taxes, if capital gains tax rates are less than dividend tax rates 
C) Lower share price 
D) A tax-free transaction

Question 3

Adoption of Rule 10b-18 by the SEC has protected firms from being prosecuted for manipulating their share price through share repurchases.

Accepted Answer

A) True 
 B)False

Question 4

Briefly discuss different ways in which a firm can pay dividends to its shareholders.

Accepted Answer

Firms that pay dividends typically pay a

Question 5

Company X has 100 shares outstanding. It earns $1,000 per year and announces that it will use all $1,000 to repurchase its shares in the open market instead of paying dividends. Calculate the number of shares outstanding at the end of year 1, after the first share repurchase, if the required rate of return is 10 percent.

Accepted Answer

A) 110 
B) 100 
C) 90.91 
D) 89 
A) 110 
B) 100 
C) 90.91 
D) 89

Question 6

Which of these dates, when arranged in chronological order, occurs last?

Accepted Answer

A) Dividend payment date 
B) Ex-dividend date 
C) Record date 
D) Dividend declaration date 
A) Dividend payment date 
B) Ex-dividend date 
C) Record date 
D) Dividend declaration date

Question 7

One possible reason that shareholders often insist on higher dividends is

Accepted Answer

A) they agree with Miller and Modigliani. 
B) the capital gains tax disadvantage. 
C) the stock market is efficient. 
D) they do not trust managers to spend retained earnings wisely. 
A) they agree with Miller and Modigliani. 
B) the capital gains tax disadvantage. 
C) the stock market is efficient. 
D) they do not trust managers to spend retained earnings wisely.

Question 8

An equivalent alternative to paying cash dividends is to pay stock dividends.

Accepted Answer

A) True 
 B)False

Question 9

Generally, firms engage in stock repurchases during
I.boom times as firms accumulate excess cash;
II.recessions due to low stock prices;
III.times when competitors' stock prices are dropping

Accepted Answer

A) I only 
B) II only 
C) III only 
D) II and III only 
A) I only 
B) II only 
C) III only 
D) II and III only

Question 10

The Miller and Modigliani dividend irrelevance argument assumes that the firm can issue new shares at a fair price.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following dividends are never in the form of cash?
I.regular dividend;
II.special dividend;
III.stock dividend;
IV.liquidating dividend

Accepted Answer

A) I only 
B) II only 
C) III only 
D) I, II, and IV only 
A) I only 
B) II only 
C) III only 
D) I, II, and IV only

Question 12

Dividend policy changes are decided and announced by
I.the managers of a firm;
II.the government;
III.the board of directors

Accepted Answer

A) I only 
B) II only 
C) III only 
D) I and II only 
A) I only 
B) II only 
C) III only 
D) I and II only

Question 13

Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as dividends. If the firm expects to maintain this dividend forever, calculate the stock price after the dividend payment. (The required rate of return is 10 percent.)

Accepted Answer

A) $110 
B) $100 
C) $90 
D) $10 
A) $110 
B) $100 
C) $90 
D) $10

Question 14

Most firms have long-run target dividend payout ratios.

Accepted Answer

A) True 
 B)False

Question 15

Briefly explain how shareholders' returns are taxed twice in the United States.

Accepted Answer

Shareholders' returns are taxed at the c

Question 16

Rightists argue that increasing a firm's dividend will increase its value. Review some of the key points in their assertion.

Accepted Answer

Investors prefer cash to capital gains a

Question 17

The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy:

Accepted Answer

A) Changes in investment policy will alter dividend policy. 
B) Changes in dividend policy will alter investment policy. 
C) Investment policy is independent of dividend policy. 
D) Dividends are tax-deductible and investments are depreciable. 
A) Changes in investment policy will alter dividend policy. 
B) Changes in dividend policy will alter investment policy. 
C) Investment policy is independent of dividend policy. 
D) Dividends are tax-deductible and investments are depreciable.

Question 18

Briefly explain how the imputation tax system works in Australia by providing an example. Assume a 30 percent corporate tax rate and a 15 percent marginal tax rate for the investor.

Accepted Answer

The answer of Briefly explain how the imputation tax system...

Question 19

Even if both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of each type of tax is different because

Accepted Answer

A) capital gains are actually taxed, while dividends are taxed on paper only. 
B) dividends are taxed when distributed, while capital gains are deferred until the stock is sold. 
C) both dividends and capital gains are taxed every year. 
D) capital gains are actually taxed, while dividends are taxed on paper; and both dividends and capital gains are taxed every year. 
A) capital gains are actually taxed, while dividends are taxed on paper only. 
B) dividends are taxed when distributed, while capital gains are deferred until the stock is sold. 
C) both dividends and capital gains are taxed every year. 
D) capital gains are actually taxed, while dividends are taxed on paper; and both dividends and capital gains are taxed every year.

Question 20

Suppose that there are no taxes, transactions costs, or other market imperfections. Which of the following actions is most likely to make shareholders better off?

Accepted Answer

A) Increase dividends. 
B) Reduce share repurchases. 
C) Announce that dividends will not change for at least three years. 
D) Eliminate negative-NPV projects. 
A) Increase dividends. 
B) Reduce share repurchases. 
C) Announce that dividends will not change for at least three years. 
D) Eliminate negative-NPV projects.

Exam 16: Payout Policy

If dividends are taxed more heavily than capital gains, then investors

What is the likely impact on a typical individual investor if a firm undertakes a stock repurchase in lieu of a cash dividend?

Adoption of Rule 10b-18 by the SEC has protected firms from being prosecuted for manipulating their share price through share repurchases.

Briefly discuss different ways in which a firm can pay dividends to its shareholders.

Which of these dates, when arranged in chronological order, occurs last?

One possible reason that shareholders often insist on higher dividends is

An equivalent alternative to paying cash dividends is to pay stock dividends.

Generally, firms engage in stock repurchases during I.boom times as firms accumulate excess cash; II.recessions due to low stock prices; III.times when competitors' stock prices are dropping

The Miller and Modigliani dividend irrelevance argument assumes that the firm can issue new shares at a fair price.

Which of the following dividends are never in the form of cash? I.regular dividend; II.special dividend; III.stock dividend; IV.liquidating dividend

Dividend policy changes are decided and announced by I.the managers of a firm; II.the government; III.the board of directors

Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as dividends. If the firm expects to maintain this dividend forever, calculate the stock price after the dividend payment. (The required rate of return is 10 percent.)

Most firms have long-run target dividend payout ratios.

Briefly explain how shareholders' returns are taxed twice in the United States.

Rightists argue that increasing a firm's dividend will increase its value. Review some of the key points in their assertion.

The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy:

Briefly explain how the imputation tax system works in Australia by providing an example. Assume a 30 percent corporate tax rate and a 15 percent marginal tax rate for the investor.

Even if both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of each type of tax is different because

Suppose that there are no taxes, transactions costs, or other market imperfections. Which of the following actions is most likely to make shareholders better off?

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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