Question 1

Many firms try to maintain a stable dividend policy ____.

Accepted Answer

A)  because of the informational content of dividend changes 
B)  in order to satisfy investors who rely on dividends as a primary source of income 
C)  in order to remain as eligible investments for many financial institutions 
D)  All of these are correct 
A)  because of the informational content of dividend changes 
B)  in order to satisfy investors who rely on dividends as a primary source of income 
C)  in order to remain as eligible investments for many financial institutions 
D)  All of these are correct D

Question 2

Firms carry out share repurchase agreements in a number of ways, including all of the following EXCEPT they ____.

Accepted Answer

A)  buy from shareholders through a tender offer 
B)  buy outstanding shares in the open market 
C)  buy treasury shares 
D)  negotiate a purchase privately from large holders, particularly institutions 
A)  buy from shareholders through a tender offer 
B)  buy outstanding shares in the open market 
C)  buy treasury shares 
D)  negotiate a purchase privately from large holders, particularly institutions C

Question 3

Interim Systems has 1.5 million shares outstanding. This year Interim will have operating income (EBIT) of $18.2 million, interest expenses of $2.4 million, depreciation expenses of $3.1 million. What will the dividend per share be if Interim's dividend payout ratio is 40%? Assume a marginal tax rate of 40%.

Accepted Answer

A)  $2.53 
B)  $3.39 
C)  $2.03 
D)  $6.32 
A)  $2.53 
B)  $3.39 
C)  $2.03 
D)  $6.32 A

Question 4

The passive residual dividend policy asserts that ____.

Accepted Answer

A)  dividends should be paid out only if the firm does not have enough acceptable investment projects to utilize all earnings internally 
B)  dividends should be paid only when the firm has ready access to new equity markets 
C)  retained earnings, being the residual earnings of the firm, should always be paid out to existing stockholders 
D)  investment policy and dividend policy decisions should always be made independently 
A)  dividends should be paid out only if the firm does not have enough acceptable investment projects to utilize all earnings internally 
B)  dividends should be paid only when the firm has ready access to new equity markets 
C)  retained earnings, being the residual earnings of the firm, should always be paid out to existing stockholders 
D)  investment policy and dividend policy decisions should always be made independently

Question 5

If Sulzer has 10 million shares outstanding, operating income (EBIT) of $42.4 million, and interest expenses of $6.8 million, what is Sulzer's dividend payout ratio, given that the dividend per share is $0.80? Assume a marginal tax rate of 40%.

Accepted Answer

A)  56.3% 
B)  31.5% 
C)  50.4% 
D)  37.5% 
A)  56.3% 
B)  31.5% 
C)  50.4% 
D)  37.5%

Question 6

The value of a firm is influenced by three types of financial decisions, including all of the following EXCEPT ____.

Accepted Answer

A)  dividend decisions 
B)  financing decisions 
C)  investment decisions 
D)  par value decisions 
A)  dividend decisions 
B)  financing decisions 
C)  investment decisions 
D)  par value decisions

Question 7

Kaneb Services Inc. has just declared a 3 for 2 stock split. The company's pre-split common stockholders' equity was as follows: $\begin{array}{ll}
\text { Common stock ( } \$ 1.25 \text { par, } 2,000,000 \text { shares) } & \$ 2,500,000 \
\text { Contributed capital in excess of par } & \$ 17,500,000 \
\text { Retained earnings } & 182,100,000\
\text { Total common stockholders' equity }&\$202,100,000
\end{array}$ ? If the pre-split price of common stock was $42, what will be the amount of retained earnings after the split?

Accepted Answer

A)  $140,100,000 
B)  $139,200,000 
C)  $182,100,000 
D)  $141,350,000 
A)  $140,100,000 
B)  $139,200,000 
C)  $182,100,000 
D)  $141,350,000

Question 8

The Percolator Company has the following capital structure: $\begin{array}{ll}
\text { Common stock ( } \$ 5 \text { par, } 250,000 \text { shares) } & \$ 1,250,000 \
\text { Contributed capital in excess of par } & \$ 5,000,000 \
\text { Retained earnings } & \$ 4,000,000
\end{array}$ ? The company declares a 10% stock dividend. The pre-stock dividend market price of the company's stock is $50. Determine the balance in the retained earnings account after the stock dividend.

Accepted Answer

A)  $4,000,000 
B)  $1,375,000 
C)  $2,750,000 
D)  $1,250,000 
A)  $4,000,000 
B)  $1,375,000 
C)  $2,750,000 
D)  $1,250,000

Question 9

The capital impairment restriction, a legal constraint on dividend payments, states that ____.

Accepted Answer

A)  only the current year's earnings may be used for dividend payments 
B)  dividends may not be paid out of stockholders' equity 
C)  a firm's capital cannot be used to make dividend payments 
D)  a firm's capital surplus can be used to make dividend payments 
A)  only the current year's earnings may be used for dividend payments 
B)  dividends may not be paid out of stockholders' equity 
C)  a firm's capital cannot be used to make dividend payments 
D)  a firm's capital surplus can be used to make dividend payments

Question 10

When a firm purchases its own stock in the open market, the repurchased shares become known as ____.

Accepted Answer

A)  treasury stock 
B)  preferred stock 
C)  option stock 
D)  reinvestment stock 
A)  treasury stock 
B)  preferred stock 
C)  option stock 
D)  reinvestment stock

Question 11

Which of the following is not one of the advantages of share repurchase as a dividend decision?

Accepted Answer

A)  It effectively converts dividend income into capital gains income. 
B)  It provides firm with greater financial flexibility in timing the payment of returns to shareholders. 
C)  All current shareholders can sell their shares at a higher price. 
D)  It represents a signal to investors that the company expects higher earnings in the future. 
A)  It effectively converts dividend income into capital gains income. 
B)  It provides firm with greater financial flexibility in timing the payment of returns to shareholders. 
C)  All current shareholders can sell their shares at a higher price. 
D)  It represents a signal to investors that the company expects higher earnings in the future.

Question 12

When a firm initiates the repurchase of stock through a tender offer, it is giving the shareholders ____.

Accepted Answer

A)  treasury stock notification 
B)  a put option 
C)  a call option 
D)  a futures option 
A)  treasury stock notification 
B)  a put option 
C)  a call option 
D)  a futures option

Question 13

In recent years, ____ has (have) been a major source of equity financing for private industry.

Accepted Answer

A)  DRIPs 
B)  common stock sales 
C)  retention of earnings 
D)  preferred stock sales 
A)  DRIPs 
B)  common stock sales 
C)  retention of earnings 
D)  preferred stock sales

Question 14

Why do firms feel that liquidity is desirable even though it may mean that the firm does not utilize the investment capability of cash? What other means does a firm use to take advantage of investment opportunities since cash must be kept on hand?

Accepted Answer

Liquidity is desirable for a number of r

Question 15

The Wagner Company tries to follow a pure "residual" dividend policy. Earnings and dividends last year were $100 million and $20 million, respectively. Anticipated earnings for this year are $80 million. The company is financed completely with common equity. The required rate of return on retained earnings is 15% and the cost of new equity is 16%. Assuming Wagner has $70 million of investment projects having expected returns greater than 15%, determine the total amount of dividends Wagner should pay.

Accepted Answer

A)  None 
B)  $10 million 
C)  $20 million in dividends and raise needed investment funds externally 
D)  $80 million in dividends and raise needed investment funds externally 
A)  None 
B)  $10 million 
C)  $20 million in dividends and raise needed investment funds externally 
D)  $80 million in dividends and raise needed investment funds externally

Question 16

In considering the arguments for the relevance of dividends, which of the following statements is (are) correct? 
I. Shareholders who are risk averse may prefer some dividends over the promise of future capital gains.
II. Flotation costs on new stock sales make dividend payout more desirable, rather than issuing new stock.

Accepted Answer

A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II 
A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II

Question 17

What is a DRIP and how does it work?

Accepted Answer

A DRIP is a dividend reinvestment plan.

Question 18

From an accounting standpoint, stock splits are accomplished by ____.

Accepted Answer

A)  increasing the number of shares authorized 
B)  increasing par value of existing shares 
C)  reducing the par value of existing shares 
D)  reducing the number of shares and increasing the price of each share 
A)  increasing the number of shares authorized 
B)  increasing par value of existing shares 
C)  reducing the par value of existing shares 
D)  reducing the number of shares and increasing the price of each share

Question 19

Dividend policy can affect the value of the firm for which of the following reasons?

Accepted Answer

A)  Personal taxes 
B)  Flotation costs 
C)  Shareholder transaction costs 
D)  All of these are correct 
A)  Personal taxes 
B)  Flotation costs 
C)  Shareholder transaction costs 
D)  All of these are correct

Question 20

Dividend payments reduce all of the following balance sheet items EXCEPT ____.

Accepted Answer

A)  cash 
B)  fixed assets 
C)  stockholders' equity 
D)  retained earnings 
A)  cash 
B)  fixed assets 
C)  stockholders' equity 
D)  retained earnings

Exam 185: Dividend Policy

Many firms try to maintain a stable dividend policy ____.

Firms carry out share repurchase agreements in a number of ways, including all of the following EXCEPT they ____.

The passive residual dividend policy asserts that ____.

If Sulzer has 10 million shares outstanding, operating income (EBIT) of $42.4 million, and interest expenses of $6.8 million, what is Sulzer's dividend payout ratio, given that the dividend per share is $0.80? Assume a marginal tax rate of 40%.

The value of a firm is influenced by three types of financial decisions, including all of the following EXCEPT ____.

The capital impairment restriction, a legal constraint on dividend payments, states that ____.

When a firm purchases its own stock in the open market, the repurchased shares become known as ____.

Which of the following is not one of the advantages of share repurchase as a dividend decision?

When a firm initiates the repurchase of stock through a tender offer, it is giving the shareholders ____.

In recent years, ____ has (have) been a major source of equity financing for private industry.

Why do firms feel that liquidity is desirable even though it may mean that the firm does not utilize the investment capability of cash? What other means does a firm use to take advantage of investment opportunities since cash must be kept on hand?

What is a DRIP and how does it work?

From an accounting standpoint, stock splits are accomplished by ____.

Dividend policy can affect the value of the firm for which of the following reasons?

Dividend payments reduce all of the following balance sheet items EXCEPT ____.

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

Continuous Compounding and Discounting

Fixed Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Mutually Exclusive Investments Having Unequal Lives

Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

Breakeven Analysis

Capital Structure Management in Practice

Working Capital Policy and Short-Term Financing

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate Term Financing

Financing With Derivatives

Bond Refunding Analysis

Risk Management

International Financial Management

Corporate Restructuring

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