Question 1

What effect does a stock dividend have on the book and market values of the firm?

Accepted Answer

A) book value increases; market value increases 
B) book value increases; market value decreases 
C) book value decreases; market value increases 
D) book and market values remain constant 
A) book value increases; market value increases 
B) book value increases; market value decreases 
C) book value decreases; market value increases 
D) book and market values remain constant

Question 2

A share repurchase is said to be equivalent to the payment of a cash dividend because each strategy:

Accepted Answer

A) causes share price to decline. 
B) causes share price to increase. 
C) creates the same tax liability for the investor. 
D) leaves the firm with the same amount of assets. 
A) causes share price to decline. 
B) causes share price to increase. 
C) creates the same tax liability for the investor. 
D) leaves the firm with the same amount of assets.

Question 3

Conservative economists feel that high dividend payouts will increase share price because:

Accepted Answer

A) capital gains are less certain than dividends. 
B) dividends signal higher future earnings. 
C) stocks are priced using dividend discount models. 
D) higher dividend payouts translate into higher investment returns. 
A) capital gains are less certain than dividends. 
B) dividends signal higher future earnings. 
C) stocks are priced using dividend discount models. 
D) higher dividend payouts translate into higher investment returns.

Question 4

When a firm announces a two-for-one stock split (in the absence of other new information), investors should expect that:

Accepted Answer

A) earnings per share will fall by half but stock price will remain the same. 
B) stock price will fall by half but earnings per share will remain the same. 
C) both earnings per share and stock price will remain the same. 
D) both earnings per share and stock price will fall by half. 
A) earnings per share will fall by half but stock price will remain the same. 
B) stock price will fall by half but earnings per share will remain the same. 
C) both earnings per share and stock price will remain the same. 
D) both earnings per share and stock price will fall by half.

Question 5

You own 1,000 shares of Xytech Corporation, whose shares are currently trading at $50.The company has disclosed that it will raise its dividend from $0.75 to $1.You would prefer that the dividend remain at its current level.What can be done to offset the effects of the increase in dividends?

Accepted Answer

Your dividend income will increase from

Question 6

With respect to the dividend-payment process, the price of a share of stock can logically be expected to drop on:

Accepted Answer

A) the payment date. 
B) the date of record. 
C) the ex-dividend date. 
D) the declaration date. 
A) the payment date. 
B) the date of record. 
C) the ex-dividend date. 
D) the declaration date.

Question 7

Investors require an after-tax rate of return of 12% on their stock investments.The tax rate on dividends is 28%, while capital gains escape taxation.A firm will pay $3 per share in dividends one year from now, after which the stock is expected to be at a price of $15.Determine the current stock price and the expected before tax rate of return for a one-year holding period.
 $$\begin{array}{l}
\begin{array} { | l | r | } 
\hline\text { DATA }\
\hline \text { Investor return } & 12 \% \
\hline \text { Dividend amourt } & \$ 3.00 \
\hline \text { Tax rate } & 28 \% \
\hline \text { Future price prediction } & \$ 15.00 \
\hline
\end{array}
\end{array}$$

Accepted Answer

The answer of Investors require an after-tax rate of return...

Question 8

XYZ Corp.has 1,000 shares outstanding and retained earnings of $25,000.Theoretically, what would you expect to happen to the price of their stock, currently selling for $30 per share, if a 25% stock dividend is declared?

Accepted Answer

A) price should increase to $44.00 per share. 
B) price should increase to $37.50 per share. 
C) price should decrease to $24.00 per share. 
D) nothing; price should remain at $30.00. 
A) price should increase to $44.00 per share. 
B) price should increase to $37.50 per share. 
C) price should decrease to $24.00 per share. 
D) nothing; price should remain at $30.00.

Question 9

Under current tax law, the longer an investor waits to sell an inflated stock, the lower is the present value of the tax liability.

Accepted Answer

A) True 
 B)False

Question 10

MM's assertion that dividend policy will not affect the value of the firm requires that dividend policy does not:

Accepted Answer

A) alter the retained earnings of the firm. 
B) affect investment and borrowing policies. 
C) allow the payout ratio to change. 
D) alter the number of outstanding shares. 
A) alter the retained earnings of the firm. 
B) affect investment and borrowing policies. 
C) allow the payout ratio to change. 
D) alter the number of outstanding shares.

Question 11

Use your knowledge of current corporate tax laws to show that a preferred stock with a 9% dividend might be preferred to a common stock having a 13% capital gain.

Accepted Answer

The Corporation will pay tax on only 30%

Question 12

A 50% stock dividend provides the same return to an investor as a 50% cash dividend.

Accepted Answer

A) True 
 B)False

Question 13

Assuming no market imperfections, which of the following will not be affected by a repurchase of shares?

Accepted Answer

A) assets of the firm. 
B) equity of the firm. 
C) shares outstanding. 
D) price per share. 
A) assets of the firm. 
B) equity of the firm. 
C) shares outstanding. 
D) price per share.

Question 14

A dividend does not accompany stocks that are purchased on the ex-dividend date.

Accepted Answer

A) True 
 B)False

Question 15

The date on which actual dividend cheques are mailed to shareholders or direct deposited is the:

Accepted Answer

A) declaration date. 
B) payment date. 
C) ex-dividend date. 
D) with-dividend date. 
A) declaration date. 
B) payment date. 
C) ex-dividend date. 
D) with-dividend date.

Question 16

When a firm declares a special cash dividend of $1 per share, shareholders realize that the:

Accepted Answer

A) annual dividend will be $4 per share. 
B) dividends are considered regular. 
C) dividend is not likely to be repeated. 
D) stock must be owned prior to the declaration date to receive the dividend. 
A) annual dividend will be $4 per share. 
B) dividends are considered regular. 
C) dividend is not likely to be repeated. 
D) stock must be owned prior to the declaration date to receive the dividend.

Question 17

When a firm declares a stock repurchase:

Accepted Answer

A) the number of outstanding shares falls along with the price 
B) the number of outstanding shares falls and the price remains unchanged 
C) an investor will receive cash in exchange for a smaller %age of ownership 
D) demand drives the stock price up 
A) the number of outstanding shares falls along with the price 
B) the number of outstanding shares falls and the price remains unchanged 
C) an investor will receive cash in exchange for a smaller %age of ownership 
D) demand drives the stock price up

Question 18

An assumption of the MM dividend irrelevance proposition is:

Accepted Answer

A) investors are willing to pay higher prices for shares with higher payouts. 
B) capital gains are offset by receiving no dividend. 
C) extra cash dividends are offset by a capital gain. 
D) extra cash dividends are offset by a capital loss. 
A) investors are willing to pay higher prices for shares with higher payouts. 
B) capital gains are offset by receiving no dividend. 
C) extra cash dividends are offset by a capital gain. 
D) extra cash dividends are offset by a capital loss.

Question 19

Discuss the concept of dividend signaling.

Accepted Answer

Managers are assumed to be best informed

Question 20

According to the MM dividend-irrelevance proposition, since investors do not need dividends to convert their shares to cash, they will not pay higher prices for firms with higher dividend payouts.

Accepted Answer

A) True 
 B)False

Exam 18: Payout Policy

What effect does a stock dividend have on the book and market values of the firm?

A share repurchase is said to be equivalent to the payment of a cash dividend because each strategy:

Conservative economists feel that high dividend payouts will increase share price because:

When a firm announces a two-for-one stock split (in the absence of other new information), investors should expect that:

You own 1,000 shares of Xytech Corporation, whose shares are currently trading at $50.The company has disclosed that it will raise its dividend from $0.75 to $1.You would prefer that the dividend remain at its current level.What can be done to offset the effects of the increase in dividends?

With respect to the dividend-payment process, the price of a share of stock can logically be expected to drop on:

XYZ Corp.has 1,000 shares outstanding and retained earnings of $25,000.Theoretically, what would you expect to happen to the price of their stock, currently selling for $30 per share, if a 25% stock dividend is declared?

Under current tax law, the longer an investor waits to sell an inflated stock, the lower is the present value of the tax liability.

MM's assertion that dividend policy will not affect the value of the firm requires that dividend policy does not:

Use your knowledge of current corporate tax laws to show that a preferred stock with a 9% dividend might be preferred to a common stock having a 13% capital gain.

A 50% stock dividend provides the same return to an investor as a 50% cash dividend.

Assuming no market imperfections, which of the following will not be affected by a repurchase of shares?

A dividend does not accompany stocks that are purchased on the ex-dividend date.

The date on which actual dividend cheques are mailed to shareholders or direct deposited is the:

When a firm declares a special cash dividend of $1 per share, shareholders realize that the:

When a firm declares a stock repurchase:

An assumption of the MM dividend irrelevance proposition is:

Discuss the concept of dividend signaling.

According to the MM dividend-irrelevance proposition, since investors do not need dividends to convert their shares to cash, they will not pay higher prices for firms with higher dividend payouts.

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

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