Question 1

Under the idealized conditions of MM, which statement is correct when a firm issues new stock in order to pay a cash dividend on existing shares?

Accepted Answer

A) the new shares are worth less than the old shares. 
B) the old shares drop in value to equal the new price. 
C) the value of the firm is reduced by the amount of the dividend. 
D) the value of the firm is unaffected. 
A) the new shares are worth less than the old shares. 
B) the old shares drop in value to equal the new price. 
C) the value of the firm is reduced by the amount of the dividend. 
D) the value of the firm is unaffected.

Question 2

An increase in share price following an increase in dividends is logical if the:

Accepted Answer

A) firm borrows to obtain cash for the dividend. 
B) increased dividend signals higher future earnings. 
C) financial markets are efficient. 
D) clientele effect is not important. 
A) firm borrows to obtain cash for the dividend. 
B) increased dividend signals higher future earnings. 
C) financial markets are efficient. 
D) clientele effect is not important.

Question 3

A policy of dividend "smoothing" refers to:

Accepted Answer

A) maintaining a constant dividend payout ratio. 
B) keeping the regular dividend at the same level indefinitely. 
C) maintaining a steady progression of dividend increases over time. 
D) alternating cash dividends with stock dividends. 
A) maintaining a constant dividend payout ratio. 
B) keeping the regular dividend at the same level indefinitely. 
C) maintaining a steady progression of dividend increases over time. 
D) alternating cash dividends with stock dividends.

Question 4

Capital gains may be preferred by investors over dividends even if their tax rates are equal because:

Accepted Answer

A) taxes on dividends are withheld from pay cheques. 
B) taxes on capital gains are paid annually. 
C) taxes on capital gains can be timed. 
D) after-tax dividends are less certain than capital gains. 
A) taxes on dividends are withheld from pay cheques. 
B) taxes on capital gains are paid annually. 
C) taxes on capital gains can be timed. 
D) after-tax dividends are less certain than capital gains.

Question 5

With a stock repurchase:

Accepted Answer

A) no cash flow is extended from the company. 
B) the company obtains some of its stock, and the value of the firm drops. 
C) shareholders' ownership in the company will decrease. 
D) the equity of the firm will increase. 
A) no cash flow is extended from the company. 
B) the company obtains some of its stock, and the value of the firm drops. 
C) shareholders' ownership in the company will decrease. 
D) the equity of the firm will increase.

Question 6

A corporation's dividend payout ratio is the percentage of _____ paid out as dividends.

Accepted Answer

A) cash 
B) earnings 
C) earnings before interest and taxes 
D) retained earnings 
A) cash 
B) earnings 
C) earnings before interest and taxes 
D) retained earnings

Question 7

How much should an investor pay now for a stock expected to sell for $30 one year from now if: the stock offers a $2 dividend, dividends are taxed at 40%, capital gains are taxed at 20%, and a 15% after-tax return is expected on the investment?

Accepted Answer

A) $25.04 
B) $26.53 
C) $27.09 
D) $27.50 
A) $25.04 
B) $26.53 
C) $27.09 
D) $27.50

Question 8

Which of the following is not an example of market imperfections that make dividend policy relevant?

Accepted Answer

A) institutional restrictions on stock holdings 
B) differences in dividend-payout ratios 
C) transaction costs such as brokerage fees 
D) differences among investors in marginal tax rates 
A) institutional restrictions on stock holdings 
B) differences in dividend-payout ratios 
C) transaction costs such as brokerage fees 
D) differences among investors in marginal tax rates

Question 9

Morso Corporation has declared a $5 per share in dividends.The federal tax rate is 26% and the provincial tax rate is 13.39%.Federal and Provincial tax credits are 13.33% and 5.1% respectively on the grossed up amount of the dividend.The gross up amount is 25%.Determine the average tax rate for dividends.

Accepted Answer

The answer of Morso Corporation has declared a $5 per...

Question 10

Which of the following statements is correct about investors in Ajax Industries, which has just announced a three-for-one stock split?

Accepted Answer

A) investors will triple their wealth after the split 
B) investors' wealth will fall by two-thirds after the split 
C) %age of ownership increases for the investors 
D) earnings per share will fall by two-thirds after the split 
A) investors will triple their wealth after the split 
B) investors' wealth will fall by two-thirds after the split 
C) %age of ownership increases for the investors 
D) earnings per share will fall by two-thirds after the split

Question 11

List several advantages and disadvantages of dividend reinvestment plans and stock repurchase plans.

Accepted Answer

Some advantages include:
> Savings to in

Question 12

Payout policy is a trade-off between ___________ and ___________.

Accepted Answer

A) retained earnings; borrowing 
B) capital budgeting; capital structure 
C) cash dividend; issuing stock 
D) declaring stock splits; stock dividends 
A) retained earnings; borrowing 
B) capital budgeting; capital structure 
C) cash dividend; issuing stock 
D) declaring stock splits; stock dividends

Question 13

Which of the following statements regarding "taxation of dividends and capital gains under current tax law" is incorrect (assuming that the marginal tax rate for a large corporation is 35%)?

Accepted Answer

A) For-profit corporations have a tax reason to prefer dividends. 
B) Corporations pay corporate income tax on only 30% of any dividends received. 
C) The effective tax rate on dividends received by large corporations is 35% of the marginal corporate tax rate. 
D) Corporations have to pay a 35% tax on the full amount of any realized capital gain. 
A) For-profit corporations have a tax reason to prefer dividends. 
B) Corporations pay corporate income tax on only 30% of any dividends received. 
C) The effective tax rate on dividends received by large corporations is 35% of the marginal corporate tax rate. 
D) Corporations have to pay a 35% tax on the full amount of any realized capital gain.

Question 14

Miller and Modigliani proclaim that, under certain ideal conditions, dividend policy is irrelevant.

Accepted Answer

What is it that they are specifically pr

Question 15

Thompson Inc.has just paid $2.50 in dividends.Determine the after tax dividend received and the average tax rate given the following tax information: 25% gross up; federal tax rate is 29%; 14% federal tax credit; 16% provincial tax rate; 6% provincial tax credit.

Accepted Answer

after tax dividends

Question 16

The manager of XYZ Corp.feels that a dividend increase will increase stock price because many investors value stock with a dividend-discount model.Why might MM disagree with this assertion?

Accepted Answer

A) the increased dividend makes the firm much riskier. 
B) future dividend growth may slow due to less retained earnings. 
C) investors prefer capital gains over dividends. 
D) dividend increases will increase the book value but not the market value of the firm. 
A) the increased dividend makes the firm much riskier. 
B) future dividend growth may slow due to less retained earnings. 
C) investors prefer capital gains over dividends. 
D) dividend increases will increase the book value but not the market value of the firm.

Question 17

Automatic dividend reinvestment plans allow firms to:

Accepted Answer

A) pay dividends on a more frequent schedule. 
B) reduce their cash outflow to shareholders. 
C) transform regular dividends into stock dividends. 
D) avoid the ex-dividend date reduction in stock price. 
A) pay dividends on a more frequent schedule. 
B) reduce their cash outflow to shareholders. 
C) transform regular dividends into stock dividends. 
D) avoid the ex-dividend date reduction in stock price.

Question 18

Which of the following statements is correct for stock purchased on the last day to trade "cum dividend"?

Accepted Answer

A) a dividend will be declared on the next trading day. 
B) a dividend will be paid on the next trading day. 
C) the stock price should decline on the next trading day. 
D) the stock price should have declined on the previous trading day. 
A) a dividend will be declared on the next trading day. 
B) a dividend will be paid on the next trading day. 
C) the stock price should decline on the next trading day. 
D) the stock price should have declined on the previous trading day.

Question 19

Show that a stock repurchase is conceptually the same as a cash dividend using the following example: Repo Corp.has 1,000 shares outstanding at a market price of $20 per share.In debating whether to declare a 5% cash dividend, the directors instead chose to repurchase 50 of the outstanding shares.

Accepted Answer

Ignoring any transaction costs, the corp

Question 20

If the total assets of a firm are unaffected by a stock dividend, then:

Accepted Answer

A) the stock should retain the same price per share. 
B) stock dividends should be preferred by corporations over cash dividends. 
C) an investor's wealth should not be changed. 
D) only bondholders benefit from stock dividends. 
A) the stock should retain the same price per share. 
B) stock dividends should be preferred by corporations over cash dividends. 
C) an investor's wealth should not be changed. 
D) only bondholders benefit from stock dividends.

Exam 18: Payout Policy

Under the idealized conditions of MM, which statement is correct when a firm issues new stock in order to pay a cash dividend on existing shares?

An increase in share price following an increase in dividends is logical if the:

A policy of dividend "smoothing" refers to:

Capital gains may be preferred by investors over dividends even if their tax rates are equal because:

With a stock repurchase:

A corporation's dividend payout ratio is the percentage of _____ paid out as dividends.

How much should an investor pay now for a stock expected to sell for $30 one year from now if: the stock offers a $2 dividend, dividends are taxed at 40%, capital gains are taxed at 20%, and a 15% after-tax return is expected on the investment?

Which of the following is not an example of market imperfections that make dividend policy relevant?

Which of the following statements is correct about investors in Ajax Industries, which has just announced a three-for-one stock split?

List several advantages and disadvantages of dividend reinvestment plans and stock repurchase plans.

Payout policy is a trade-off between ___________ and ___________.

Which of the following statements regarding "taxation of dividends and capital gains under current tax law" is incorrect (assuming that the marginal tax rate for a large corporation is 35%)?

Miller and Modigliani proclaim that, under certain ideal conditions, dividend policy is irrelevant.

Thompson Inc.has just paid $2.50 in dividends.Determine the after tax dividend received and the average tax rate given the following tax information: 25% gross up; federal tax rate is 29%; 14% federal tax credit; 16% provincial tax rate; 6% provincial tax credit.

The manager of XYZ Corp.feels that a dividend increase will increase stock price because many investors value stock with a dividend-discount model.Why might MM disagree with this assertion?

Automatic dividend reinvestment plans allow firms to:

Which of the following statements is correct for stock purchased on the last day to trade "cum dividend"?

Show that a stock repurchase is conceptually the same as a cash dividend using the following example: Repo Corp.has 1,000 shares outstanding at a market price of $20 per share.In debating whether to declare a 5% cash dividend, the directors instead chose to repurchase 50 of the outstanding shares.

If the total assets of a firm are unaffected by a stock dividend, then:

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Leasing

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters

Payout policy is a trade-off between _ and _.