Question 1

Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be?

Accepted Answer

A)  48.11% 
B)  50.52% 
C)  55.57% 
D)  61.13% 
E)  67.24% 
A)  48.11% 
B)  50.52% 
C)  55.57% 
D)  61.13% 
E)  67.24% A

Question 2

New Orleans Builders Inc. has the following data. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Accepted Answer

A)  18.23% 
B)  20.25% 
C)  22.50% 
D)  25.00% 
E)  27.50% 
A)  18.23% 
B)  20.25% 
C)  22.50% 
D)  25.00% 
E)  27.50% D

Question 3

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

Accepted Answer

A) True 
 B)False  True

Question 4

Whited Products recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the firm's total market value increased by 5% as a result of increased liquidity and favorable signaling effects, what was the stock price following the split?

Accepted Answer

A)  $29.93 
B)  $31.50 
C)  $33.08 
D)  $34.73 
E)  $36.47 
A)  $29.93 
B)  $31.50 
C)  $33.08 
D)  $34.73 
E)  $36.47

Question 5

Your firm follows a strict residual dividend policy. All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

Accepted Answer

A)  The firm's net income increases. 
B)  The company increases the percentage of equity in its target capital structure. 
C)  The number of profitable potential projects increases. 
D)  Congress lowers the tax rate on capital gains, leaving the rest of the tax code unchanged. 
E)  Earnings are unchanged, but the firm issues new shares of common stock. 
A)  The firm's net income increases. 
B)  The company increases the percentage of equity in its target capital structure. 
C)  The number of profitable potential projects increases. 
D)  Congress lowers the tax rate on capital gains, leaving the rest of the tax code unchanged. 
E)  Earnings are unchanged, but the firm issues new shares of common stock.

Question 6

Which of the following statements is NOT CORRECT?

Accepted Answer

A)  Stock repurchases can be used by a firm as part of a plan to change its capital structure. 
B)  After a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise. 
C)  Investors may interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued, or, alternatively, as a signal that the firm does not have many good investment opportunities. 
D)  A company can repurchase stock to distribute a large one-time cash inflow, say from the sale of a division, to stockholders without having to increase its regular dividend. 
E)  Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan. 
A)  Stock repurchases can be used by a firm as part of a plan to change its capital structure. 
B)  After a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise. 
C)  Investors may interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued, or, alternatively, as a signal that the firm does not have many good investment opportunities. 
D)  A company can repurchase stock to distribute a large one-time cash inflow, say from the sale of a division, to stockholders without having to increase its regular dividend. 
E)  Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan.

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)  Historically, the tax code has encouraged companies to pay dividends rather than retain earnings. 
B)  If a company uses the residual dividend model to determine its dividend payments, dividend payout will tend to increase whenever its profitable investment opportunities increase relatively rapidly. 
C)  The more a firm's management believes in the clientele effect, the more likely the firm is to adhere strictly to the residual dividend model. 
D)  Large stock repurchases financed by debt tend to increase expected earnings per share, but they also tend to increase the firm's financial risk. 
E)  A dollar paid out to repurchase stock has the same tax benefit as a dollar paid out in dividends. Thus, both companies and investors should be indifferent between distributing cash through dividends and stock repurchase programs. 
A)  Historically, the tax code has encouraged companies to pay dividends rather than retain earnings. 
B)  If a company uses the residual dividend model to determine its dividend payments, dividend payout will tend to increase whenever its profitable investment opportunities increase relatively rapidly. 
C)  The more a firm's management believes in the clientele effect, the more likely the firm is to adhere strictly to the residual dividend model. 
D)  Large stock repurchases financed by debt tend to increase expected earnings per share, but they also tend to increase the firm's financial risk. 
E)  A dollar paid out to repurchase stock has the same tax benefit as a dollar paid out in dividends. Thus, both companies and investors should be indifferent between distributing cash through dividends and stock repurchase programs.

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  If a company has a 2-for-1 stock split, its stock price should roughly double. 
B)  Capital gains earned on shares repurchased are taxed less favorably than dividends, which is why companies typically pay dividends and avoid share repurchases. 
C)  often, a company's stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen. 
D)  Stock repurchases increase the number of outstanding shares. 
E)  The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter. Answer: c is correct, but perhaps the easiest way to answer this question is to eliminate the other choices, which are obviously wrong. 
A)  If a company has a 2-for-1 stock split, its stock price should roughly double. 
B)  Capital gains earned on shares repurchased are taxed less favorably than dividends, which is why companies typically pay dividends and avoid share repurchases. 
C)  often, a company's stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen. 
D)  Stock repurchases increase the number of outstanding shares. 
E)  The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter. Answer: c is correct, but perhaps the easiest way to answer this question is to eliminate the other choices, which are obviously wrong.

Question 9

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is lowered. Their argument is based on the assumption that

Accepted Answer

A)  investors are indifferent between dividends and capital gains. 
B)  investors require that the dividend yield plus the capital gains yield equal a constant. 
C)  capital gains are taxed at a higher rate than dividends. 
D)  investors view dividends as being less risky than potential future capital gains. 
E)  investors prefer a dollar of expected capital gains to a dollar of expected dividends because of the lower tax rate on capital gains. 
A)  investors are indifferent between dividends and capital gains. 
B)  investors require that the dividend yield plus the capital gains yield equal a constant. 
C)  capital gains are taxed at a higher rate than dividends. 
D)  investors view dividends as being less risky than potential future capital gains. 
E)  investors prefer a dollar of expected capital gains to a dollar of expected dividends because of the lower tax rate on capital gains.

Question 10

If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

Accepted Answer

A) True 
 B)False

Question 11

If a firm adheres strictly to the residual dividend policy, and if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay

Accepted Answer

A)  the same dividend as it paid the prior year. 
B)  no dividends to common stockholders. 
C)  dividends only out of funds raised by the sale of new common stock. 
D)  dividends only out of funds raised by borrowing money (i.e., issuing debt). 
E)  dividends only out of funds raised by selling off fixed assets. 
A)  the same dividend as it paid the prior year. 
B)  no dividends to common stockholders. 
C)  dividends only out of funds raised by the sale of new common stock. 
D)  dividends only out of funds raised by borrowing money (i.e., issuing debt). 
E)  dividends only out of funds raised by selling off fixed assets.

Question 12

If a firm pays out all of its earnings as dividends and its stockholders then elect to have all of their dividends reinvested, the company should reconsider its dividend policy and possibly move to a lower payout ratio.

Accepted Answer

A) True 
 B)False

Question 13

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)  If a firm repurchases some of its stock in the open market, then shareholders who sell their stock for more than they paid for it will be subject to capital gains taxes. 
B)  An open-market dividend reinvestment plan will be most attractive to companies that need new equity and would otherwise have to issue additional shares of common stock through investment bankers. 
C)  Stock repurchases tend to reduce financial leverage. 
D)  If a company declares a 2-for-1 stock split, its stock price should roughly double. 
E)  One advantage of adopting the residual dividend policy is that this makes it easier for corporations to meet the requirements of Modigliani and Miller's dividend clientele theory. 
A)  If a firm repurchases some of its stock in the open market, then shareholders who sell their stock for more than they paid for it will be subject to capital gains taxes. 
B)  An open-market dividend reinvestment plan will be most attractive to companies that need new equity and would otherwise have to issue additional shares of common stock through investment bankers. 
C)  Stock repurchases tend to reduce financial leverage. 
D)  If a company declares a 2-for-1 stock split, its stock price should roughly double. 
E)  One advantage of adopting the residual dividend policy is that this makes it easier for corporations to meet the requirements of Modigliani and Miller's dividend clientele theory.

Question 15

Which of the following does NOT normally influence a firm's dividend policy decision?

Accepted Answer

A)  The firm's ability to accelerate or delay investment projects without adverse consequences. 
B)  A strong preference by most of its shareholders for current cash income versus potential future capital gains. 
C)  Constraints imposed by the firm's bond indenture. 
D)  The fact that much of the firm's equipment is leased rather than bought and owned. 
E)  The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains. 
A)  The firm's ability to accelerate or delay investment projects without adverse consequences. 
B)  A strong preference by most of its shareholders for current cash income versus potential future capital gains. 
C)  Constraints imposed by the firm's bond indenture. 
D)  The fact that much of the firm's equipment is leased rather than bought and owned. 
E)  The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains.

Question 16

You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company is about to declare a 2-for-1 stock split. Which of the following best describes your likely position after the split?

Accepted Answer

A)  You will have 200 shares of stock, and the stock will trade at or near $120 a share. 
B)  You will have 200 shares of stock, and the stock will trade at or near $60 a share. 
C)  You will have 100 shares of stock, and the stock will trade at or near $60 a share. 
D)  You will have 50 shares of stock, and the stock will trade at or near $120 a share. 
E)  You will have 50 shares of stock, and the stock will trade at or near $600 a share. 
A)  You will have 200 shares of stock, and the stock will trade at or near $120 a share. 
B)  You will have 200 shares of stock, and the stock will trade at or near $60 a share. 
C)  You will have 100 shares of stock, and the stock will trade at or near $60 a share. 
D)  You will have 50 shares of stock, and the stock will trade at or near $120 a share. 
E)  You will have 50 shares of stock, and the stock will trade at or near $600 a share.

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)  Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios. 
B)  One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like. 
C)  An increase in the stock price when a company cuts its dividend is consistent with signaling theory as postulated by MM. 
D)  If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price. 
E)  Stock repurchases make the most sense at times when a company believes its stock is undervalued. 
A)  Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios. 
B)  One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like. 
C)  An increase in the stock price when a company cuts its dividend is consistent with signaling theory as postulated by MM. 
D)  If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price. 
E)  Stock repurchases make the most sense at times when a company believes its stock is undervalued.

Question 18

Which of the following actions will best enable a company to raise additional equity capital, other things held constant?

Accepted Answer

A)  Refund long-term debt with lower cost short-term debt. 
B)  Declare a stock split. 
C)  Begin an open-market purchase dividend reinvestment plan. 
D)  Initiate a stock repurchase program. 
E)  Begin a new-stock dividend reinvestment plan. 
A)  Refund long-term debt with lower cost short-term debt. 
B)  Declare a stock split. 
C)  Begin an open-market purchase dividend reinvestment plan. 
D)  Initiate a stock repurchase program. 
E)  Begin a new-stock dividend reinvestment plan.

Question 19

It has been argued that investors prefer high-payout companies because dividends are more certain (less risky) than the capital gains that are supposed to come from retained earnings. However, Miller and Modigliani say that this argument is incorrect, and they call it the "bird-in-the-hand fallacy." MM base their argument on the belief that most dividends are reinvested in stocks, hence are exposed to the same risks as reinvested earnings.

Accepted Answer

A) True 
 B)False

Question 20

If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that

Accepted Answer

A)  the dividend payout ratio has remained constant. 
B)  the dividend payout ratio is increasing. 
C)  no dividends will be paid during the year. 
D)  the dividend payout ratio is decreasing. 
E)  the dollar amount of capital investments had decreased. 
A)  the dividend payout ratio has remained constant. 
B)  the dividend payout ratio is increasing. 
C)  no dividends will be paid during the year. 
D)  the dividend payout ratio is decreasing. 
E)  the dollar amount of capital investments had decreased.

Exam 15: Distributions to Shareholders: Dividends and

Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be?

New Orleans Builders Inc. has the following data. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

Whited Products recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the firm's total market value increased by 5% as a result of increased liquidity and favorable signaling effects, what was the stock price following the split?

Your firm follows a strict residual dividend policy. All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

Which of the following statements is NOT CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is lowered. Their argument is based on the assumption that

If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

If a firm adheres strictly to the residual dividend policy, and if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay

If a firm pays out all of its earnings as dividends and its stockholders then elect to have all of their dividends reinvested, the company should reconsider its dividend policy and possibly move to a lower payout ratio.

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Which of the following statements is CORRECT?

Which of the following does NOT normally influence a firm's dividend policy decision?

You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company is about to declare a 2-for-1 stock split. Which of the following best describes your likely position after the split?

Which of the following statements is CORRECT?

Which of the following actions will best enable a company to raise additional equity capital, other things held constant?

If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds and Their Valuation

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

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