Question 1

Most states limit dividend policy by requiring that dividends ____.

Accepted Answer

A)  not be paid unless the firm generates net earnings during the most recent year 
B)  be paid only out of retained earnings 
C)  not be paid when the firm is insolvent 
D)  be paid out of the firm's capital 
A)  not be paid unless the firm generates net earnings during the most recent year 
B)  be paid only out of retained earnings 
C)  not be paid when the firm is insolvent 
D)  be paid out of the firm's capital

Question 2

The Altern Music Co. earns $4.25 per share, has 70,000 shares outstanding, and a capital budget of $200,000. If Altern Music raises all its funds internally and follows the "passive residual policy," what are the annual dividends per share?

Accepted Answer

A)  $1.70 
B)  $1.39 
C)  $2.55 
D)  $2.81 
A)  $1.70 
B)  $1.39 
C)  $2.55 
D)  $2.81

Question 3

Wrenn Corp. has 5.6 million shares outstanding, interest expenses of $4.4 million, and depreciation expenses of $3.7 million. What is Wrenn's operating income if the dividend per share is $0.80 and the dividend payout ratio is 35%? Assume a marginal tax rate of 40%.

Accepted Answer

A)  $15.89 million 
B)  $25.73 million 
C)  $21.33 million 
D)  $29.43 million 
A)  $15.89 million 
B)  $25.73 million 
C)  $21.33 million 
D)  $29.43 million

Question 4

Which of the following factors influence a firm's ability and/or willingness to pay dividends?

Accepted Answer

A)  liquidity 
B)  borrowing capacity and access to capital markets 
C)  earnings stability 
D)  All of these are correct 
A)  liquidity 
B)  borrowing capacity and access to capital markets 
C)  earnings stability 
D)  All of these are correct

Question 5

Concin has the following equity accounts on its balance sheet: $\begin{array}{lr}
\text { Common stock ( } \$ 0.25 \text { par, } 9 \text { million shares) } & \$ 2,250,000 \
\text { Contributed capital in excess of par } & 89,400,000 \
\text { Retain earnings } & 67,503,189 \
&\$159,153,189
\end{array}$ ? The current market price for a share of Concin's stock is $24.25. If the firm declares a 10% stock dividend and a $0.06 per share cash dividend, what will be the impact on Common stock on the above equity account?

Accepted Answer

A)  No change 
B)  Increase of $225,000 
C)  Increase of $54,000 
D)  Increase of $21,600,000 
A)  No change 
B)  Increase of $225,000 
C)  Increase of $54,000 
D)  Increase of $21,600,000

Question 6

Which of the following balance sheet items will a stock dividend not affect?

Accepted Answer

A)  Total assets 
B)  Retained earnings 
C)  Contributed capital in excess of par 
D)  Common stock at par 
A)  Total assets 
B)  Retained earnings 
C)  Contributed capital in excess of par 
D)  Common stock at par

Question 7

Haulsee Inc. paid a quarterly dividend of $0.12 and has announced both a 10% stock dividend and an increase in the quarterly dividend to $0.14. What is the effective rate of the dividend increase?

Accepted Answer

A)  26.7% 
B)  18.3% 
C)  28.3% 
D)  15.7% 
A)  26.7% 
B)  18.3% 
C)  28.3% 
D)  15.7%

Question 8

Firms with the ____ earnings growth tend to have the ____ dividend payout ratio.

Accepted Answer

A)  highest; highest 
B)  highest; lowest 
C)  lowest; lowest 
D)  lowest; highest 
A)  highest; highest 
B)  highest; lowest 
C)  lowest; lowest 
D)  lowest; highest

Question 9

A legal constraint that dividends must be paid out of a firm's present and past net earnings is known as the ____ restriction.

Accepted Answer

A)  net earnings 
B)  net operating earnings 
C)  initial investment 
D)  earned capital 
A)  net earnings 
B)  net operating earnings 
C)  initial investment 
D)  earned capital

Question 10

A firm with stable earnings is usually more willing to ____.

Accepted Answer

A)  retain more earnings 
B)  have a higher dividend payout ratio 
C)  have a sinking fund agreement 
D)  seek aggressive growth 
A)  retain more earnings 
B)  have a higher dividend payout ratio 
C)  have a sinking fund agreement 
D)  seek aggressive growth

Question 11

HiTec is growing fast and wishes to retain all its earnings to finance future growth. Instead of a cash dividend, HiTec declares a 10% stock dividend. If the price per share of HiTec stock is $30 before the ex-dividend date, what will be the price on the ex-dividend date?

Accepted Answer

A)  $27.27 
B)  $27.94 
C)  $33.00 
D)  $27.00 
A)  $27.27 
B)  $27.94 
C)  $33.00 
D)  $27.00

Question 12

Sorsi has declared a 15% stock dividend. If the stock was selling for $34 before the ex-dividend date, what should its price be on the ex-dividend date?

Accepted Answer

A)  $34.00 
B)  $29.57 
C)  $28.90 
D)  $30.91 
A)  $34.00 
B)  $29.57 
C)  $28.90 
D)  $30.91

Question 13

Nova earned $7.20 per share and maintains a stable payout ratio of 60%. Nova has 1,000,000 shares outstanding and a capital budget of $5 million. If Nova maintains a debt ratio of 0.50, what were the dividends per share?

Accepted Answer

A)  $4.32 
B)  $2.88 
C)  $2.20 
D)  Cannot be determined from the information provided 
A)  $4.32 
B)  $2.88 
C)  $2.20 
D)  Cannot be determined from the information provided

Question 14

Under the Revenue Reconciliation Act of 1993, the tax-paying individual investor may prefer low dividends and higher expected capital gains because ____.

Accepted Answer

A)  the top marginal rate is lower on dividend income than on capital gains 
B)  the taxes on capital gains can be deferred 
C)  capital gains are more certain than share repurchases 
D)  the tax on capital gains is 28% 
A)  the top marginal rate is lower on dividend income than on capital gains 
B)  the taxes on capital gains can be deferred 
C)  capital gains are more certain than share repurchases 
D)  the tax on capital gains is 28%

Question 15

Which of the following does not contain restrictive covenants?

Accepted Answer

A)  Preferred stock agreements 
B)  Lease contracts 
C)  Bond indentures 
D)  Agency restrictions 
A)  Preferred stock agreements 
B)  Lease contracts 
C)  Bond indentures 
D)  Agency restrictions

Question 16

According to the ____ dividend policy, a firm that has more funds than it needs should pay a cash dividend to shareholders.

Accepted Answer

A)  constant payout ratio 
B)  stable dollar 
C)  passive residual 
D)  reinvestment 
A)  constant payout ratio 
B)  stable dollar 
C)  passive residual 
D)  reinvestment

Question 17

Leigh Fibers has 6 million shares outstanding. This year Leigh will have operating income (EBIT) of $36.4 million, interest expenses of $5.8 million, and depreciation expenses of $6.2 million. What will be Leigh's dividend per share if the company has a payout ratio of 30%? Assume a marginal tax rate of 40%.

Accepted Answer

A)  $0.92 
B)  $0.73 
C)  $1.09 
D)  $0.61 
A)  $0.92 
B)  $0.73 
C)  $1.09 
D)  $0.61

Question 18

____ determines the ultimate distribution of the firm's earnings between reinvestment and cash dividend payment to shareholders.

Accepted Answer

A)  Board of Directors' agreements 
B)  Dividend policy 
C)  Financial expertise 
D)  Management efficiency 
A)  Board of Directors' agreements 
B)  Dividend policy 
C)  Financial expertise 
D)  Management efficiency

Question 19

Zycad has operating earnings (EBIT) of $8.6 million and annual interest expenses are $1.5 million. Zycad wishes to maintain its annual dividend of $1.00 per share on the 1,900,000 shares outstanding. The firm has a bond issue outstanding that requires the retirement of $3 million (face value) of the issue each year through purchases of the bonds in the market. What is the maximum dividend per share that may be paid if the current market price of the bonds is $85? Assume the marginal tax rate is 40% and that earnings are the only source of funds that can be used to pay the dividend and retire the bonds.

Accepted Answer

A)  $0.66 
B)  $0.16 
C)  $1.37 
D)  $0.90 
A)  $0.66 
B)  $0.16 
C)  $1.37 
D)  $0.90

Question 20

The dividend ____ states that investors will tend to be attracted to firms that have dividend policies consistent with the investor's objectives.

Accepted Answer

A)  "clientele effect" 
B)  "informational content" 
C)  signal 
D)  passive residual theory 
A)  "clientele effect" 
B)  "informational content" 
C)  signal 
D)  passive residual theory

Exam 185: Dividend Policy

Most states limit dividend policy by requiring that dividends ____.

The Altern Music Co. earns $4.25 per share, has 70,000 shares outstanding, and a capital budget of $200,000. If Altern Music raises all its funds internally and follows the "passive residual policy," what are the annual dividends per share?

Wrenn Corp. has 5.6 million shares outstanding, interest expenses of $4.4 million, and depreciation expenses of $3.7 million. What is Wrenn's operating income if the dividend per share is $0.80 and the dividend payout ratio is 35%? Assume a marginal tax rate of 40%.

Which of the following factors influence a firm's ability and/or willingness to pay dividends?

Which of the following balance sheet items will a stock dividend not affect?

Haulsee Inc. paid a quarterly dividend of $0.12 and has announced both a 10% stock dividend and an increase in the quarterly dividend to $0.14. What is the effective rate of the dividend increase?

Firms with the ____ earnings growth tend to have the ____ dividend payout ratio.

A legal constraint that dividends must be paid out of a firm's present and past net earnings is known as the ____ restriction.

A firm with stable earnings is usually more willing to ____.

HiTec is growing fast and wishes to retain all its earnings to finance future growth. Instead of a cash dividend, HiTec declares a 10% stock dividend. If the price per share of HiTec stock is $30 before the ex-dividend date, what will be the price on the ex-dividend date?

Sorsi has declared a 15% stock dividend. If the stock was selling for $34 before the ex-dividend date, what should its price be on the ex-dividend date?

Nova earned $7.20 per share and maintains a stable payout ratio of 60%. Nova has 1,000,000 shares outstanding and a capital budget of $5 million. If Nova maintains a debt ratio of 0.50, what were the dividends per share?

Under the Revenue Reconciliation Act of 1993, the tax-paying individual investor may prefer low dividends and higher expected capital gains because ____.

Which of the following does not contain restrictive covenants?

According to the ____ dividend policy, a firm that has more funds than it needs should pay a cash dividend to shareholders.

____ determines the ultimate distribution of the firm's earnings between reinvestment and cash dividend payment to shareholders.

The dividend ____ states that investors will tend to be attracted to firms that have dividend policies consistent with the investor's objectives.

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

Filters

Firms with the earnings growth tend to have the dividend payout ratio.